nep-fmk New Economics Papers
on Financial Markets
Issue of 2005‒10‒22
176 papers chosen by
Carolina Valiente
London South Bank University

  1. Insurance Companies in Emerging Markets By Janet Kong; Manmohan Singh
  2. Pension Funds and Emerging Markets By Jorge A. Chan Lau
  3. How Private Creditors Fared in Emerging Debt Markets, 1970-2000 By Christoph Klingen; Jeromin Zettelmeyer; Beatrice Weder
  4. The Role of Mature Market Mutual Funds in Emerging Markets: Myth or Mayhem? By Li L. Ong; Amadou N. R. Sy
  5. A Latent Factor Model with Global, Country, and Industry Shocks for International Stock Returns By Marco Del Negro; Robin Brooks
  6. An Option-Based Approach to Bank Vulnerabilities in Emerging Markets By Arnaud Jobert; Janet Kong; Jorge A. Chan-Lau
  7. Equity Prices, Credit Default Swaps, and Bond Spreads in Emerging Markets By Yoon-suh Kim; Jorge A. Chan-Lau
  8. International Capital Flows, Returns and World Financial Integration By Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University)
  9. U.S. Mutual Fund Retail Investors in International Equity Markets: Is the Tail Wagging the Dog? By Li L. Ong; Jorge A. Chan-Lau
  10. Japan's Distressed Debt Market By Kazunari Ohashi; Manmohan Singh
  11. A Global View of the U.S. Investment Position By Andrew Swiston
  12. Deriving Market Expectations for the Euro-Dollar Exchange Rate from Option Prices By Noureddine Krichene
  13. A Puzzle of Microstructure Market Maker Models By Rafael Romeu
  14. Foreign Banks in Emerging Market Crises: Evidence from Malaysia By Enrica Detragiache; Poonam Gupta
  15. A (New) Country Insurance Facility By Tito Cordella; Eduardo Levy Yeyati
  16. Subordinated Levy Processes and Applications to Crude Oil Options By Noureddine Krichene
  17. Does SDDS Subscription Reduce Borrowing Costs for Emerging Market Economies By John Cady
  18. Overpricing in Emerging Market Credit-Default-Swap Contracts: Some Evidence from Recent Distress Cases By Jochen R. Andritzky; Manmohan Singh
  19. Foreign Bank Supervision and Challenges to Emerging Market Supervisors By Inwon Song
  20. Banking Competition, Risk, and Regulation By Wilko Bolt; Alexander F. Tieman
  21. Hedging Foreign Exchange Risk in Chile: Markets and Instruments By Jorge A. Chan-Lau
  22. Investment Restrictions and Contagion in Emerging Markets By Anna Ilyina
  23. Balance Sheets, Exchange Rate Policy, and Welfare By Ivan Tchakarov; Selim Elekdag
  24. Managing Confidence in Emerging Market Bank Runs By Ashoka Mody; Se-Jik Kim
  25. Managing the Interest Rate Risk of Indian Banks' Government Securities Holdings By Amadou N. R. Sy
  26. Monetary Policy, Monetary Areas, and Financial Development with Electronic Money By Marco Arnone; Luca Bandiera
  27. Central Bank Losses and Experiences in Selected Countries By John W. Dalton; Claudia Helene Dziobek
  28. The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital? By Abdul Abiad; Nienke Oomes; Kenichi Ueda
  29. Financial Crisis, Economic Recovery and Banking Development in Russia, Ukraine, and Other FSU Countries By Dalia Marin; Haizhou Huang; Chenggang Xu
  30. The Real Effect of Banking Crises By Raghuram Rajan; Giovanni Dell'Ariccia; Enrica Detragiache
  31. Bank Consolidation and Performance: The Argentine Experience By Pablo Druck; Raul Susmel; Ritu Basu; David Marston
  32. The Impact of Macroeconomic Announcements on Emerging Market Bonds By Jochen R. Andritzky; Geoffrey J. Bannister; Natalia T. Tamirisa
  33. Competition in Indian Banking By A. Prasad; Saibal Ghosh
  34. Latin American Central Bank Reform: Progress and Challenges By Agustin Carstens; Luis Ignacio Jácome H.
  35. Quota Brokers By Kala Krishna; Susumu Imai; Abhiroop Mukhopadhyay; Ling Hui Tan
  36. From Fixed to Float: Operational Aspects of Moving Towards Exchange Rate Flexibility By Gilda Fernandez; Cem Karacadag; Rupa Duttagupta
  37. Bank Behavior in Developing Countries: Evidence from East Africa By Richard Podpiera; Martin Cihák
  38. Competition and Efficiency in Banking: Behavioral Evidence from Ghana By Johan Mathisen; Thierry D. Buchs
  39. Stock Market Liquidity and the Macroeconomy: Evidence from Japan By David Cook; Woon Gyu Choi
  40. An Anatomy of Corporate Bond Markets: Growing Pains and Knowledge Gains By Li L. Ong; Pipat Luengnaruemitchai
  41. International Risk Sharing and Currency Unions: The CFA Zones By Etienne B. Yehoue
  42. Corporate Financial Structure and Financial Stability By Mark R. Stone; E. P. Davis
  43. Multinational Affiliates and Local Financial Markets By Selin Sayek; Hyoung Goo Kang; Alexander Lehmann
  44. Foreign Exchange Market Organization in Selected Developing and Transition Economies: Evidence from a Survey By Jorge Iván Canales Kriljenko
  45. Are Emerging Market Countries Learning to Float? By Dalia Hakura
  46. Financial Development, Financial Fragility, and Growth By Romain Ranciere; Norman Loayza
  47. Setting the Stage for a National Currency in the West Bank and Gaza: The Choice of Exchange Rate Regime By S. Beidas; Magda E. Kandil
  48. An Estimated Small Open Economy Model of the Financial Accelerator By Ivan Tchakarov; Selim Elekdag; Alejandro Justiniano
  49. Regional Integration of Stock Exchanges in Eastern and Southern Africa: Progress and Prospects By Jacqueline Irving
  50. Liberalization, Prudential Supervision, and Capital Requirements: The Policy Trade-Offs By Elina Ribakova
  51. Foreign Exchange Market Volatility in EU Accession Countries in the Run-up to Euro Adoption: Weathering Uncharted Waters By Ádám Kóbor; István P. Székely
  52. China: Sources of Real Exchange Rate Fluctuations By Tao Wang
  53. The Monetary Transmission Mechanism By Peter N. Ireland
  54. Demographic Developments, Funded Pension Provision and Financial Stability By Stefan W. Schmitz
  55. Financial Integration, Growth, and Volatility By Aude Pommeret; Anne Epaulard
  56. Monetary and Exchange Rate Dynamics During Disinflation: An Empirical Analysis By Andrés Arias; Lei Zhang; A. Javier Hamann
  57. The Effects of Exchange Rate Change on the Trade Balance in Croatia By Tihomir Stucka
  58. Impacts of different asset correlations in multi-sector credit portfolio models By Hamerle, Alfred; Knapp, Michael; Wildenauer, Nicole
  59. Structural Factors Affecting Exchange Rate Volatility: A Cross-Section Study By Jorge Iván Canales Kriljenko; Karl Friedrich Habermeier
  60. When in Peril, Retrench: Testing the Portfolio Channel of Contagion By Fernando Broner; Gaston Gelos; Carmen Reinhart
  61. The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey By Roberto Pereira Guimarães; Cem Karacadag
  62. Microeconomics of Achieving and Sustaining Supernormal Growth in Shareholder Value – Information Theoretic Approach By michael george
  63. Optimal Monetary Policy and Asset Price Misalignments By Alexandros Kontonikas and Alberto Montagnoli
  64. Credit Rationing in Emerging Economies' Access to Global Capital Markets By Edda Zoli
  65. Identifying Threshold Effects in Credit Risk Stress Testing By Jose Giancarlo Gasha; Armando Méndez Morales
  66. The Contagion Effect of the Terrorist Attacks of the 11th of September By Joao Leitao; Cristovao Oliveira
  67. Derivative Market Competition: OTC Versus Organized Derivative Exchanges By Jens Nystedt
  68. The Geometry of Crashes - A Measure of the Dynamics of Stock Market Crises By Tanya Araujo; Francisco Louçã
  69. Were Bid-Ask Spreads in the FX Market Excessive During the Asian Crisis? By Törbjörn I. Becker; Amadou N. R. Sy
  70. A Framework for the Surveillance of Derivative Activities By Eva Gutierrez
  71. Does Financial Globalization Induce Better Macroeconomic Policies? By Irina Tytell; Shang-Jin Wei
  72. The Impact of Terrorism on Financial Markets By Oana M. Nedelescu; R. B. Johnston
  73. The Importance of Nontradable Goods%u2019 Prices in Cyclical Real Exchange Rate Fluctuations By Ariel Burstein; Martin Eichenbaum; Sergio Rebelo
  74. Governance Structures and Decision-Making Roles in Inflation-Targeting Central Banks By Anita Tuladhar
  75. The Composition of Capital Flows: Is South Africa Different? By Norbert Funke; Faisal Ahmed; Rabah Arezki
  76. Unit Roots, Nonlinear Cointegration and Purchasing Power Parity By Alfred A. Haug; Syed A. Basher
  77. Financial Integration: A New Methodology and an Illustration By Robert P. Flood; Andrew K. Rose
  78. Rational Speculation, Financial Crises, and Optimal Policy Responses By Jay Surti
  79. Managerial Incentives and Financial Contagion By Sujit Chakravorti; Subir Lall
  80. Cross-Country Empirical Studies of Systemic Bank Distress: A Survey By Enrica Detragiache; Asli Demirgüç-Kunt
  81. Macroeconomic Implications of the Transition to Inflation Targeting and Capital Account Liberalization in Romania By Nikolay Gueorguiev; Pelin Berkmen
  82. On the Robustness of Racial Discrimination Findings in Mortgage Lending Studies By Judith A. Clarke; Marsha J. Courchane; Nilanjana Roy
  83. European Union Enlargement and Equity Markets in Accession Countries By Richard Podpiera; Tomas Dvorak
  85. Did the Basel Accord cause a Credit Slowdown in Latin America? By Adolfo Barajas; Ralph Chami; Thomas F. Cosimano
  86. Transparency in Central Bank Financial Statement Disclosures By Kenneth Sullivan
  87. Understanding Order Flow By Martin D. D. Evans (Georgetown University) and Richard K. Lyons (U.C. Berkeley and NBER)
  88. Explaining Efficiency Differences Among Large German and Austrian Banks By David Hauner
  89. The Accountability of Financial Sector Supervisors: Principles and Practice By Eva H. G. Hüpkes; Marc Quintyn; Michael Taylor
  90. Challenging the Empirical Evidence from Present Value Models of the Current Account By Benoît Mercereau; Jacques Miniane
  91. Financial De-Dollarization: Is It for Real? By Alain Ize; Eduardo Levy Yeyati
  92. Capitalizing Central Banks: A Net Worth Approach By Alain Ize
  93. Can Higher Reserves Help Reduce Exchange Rate Volatility? By Ketil Hviding; M. Nowak; Luca Antonio Ricci
  94. Capital Account Liberalization and the Real Exchange Rate in Chile By Guillermo R. LeFort-Varela
  95. Quantitative Assessment of a Financial System--Barbados By Kevin Greenidge; Karen Chase; Winston Moore; DeLisle Worrell
  96. Interest Rate Defenses of Currency Pegs By Juan Sole
  97. The IMF in a World of Private Capital Markets By Ashoka Mody; Barry J. Eichengreen; Kenneth Kletzer
  98. The Equilibrium Real Exchange Rate in a Commodity Exporting Country: Algeria's Experience By Taline Koranchelian
  99. Managing Systemic Liquidity Risk in Financially Dollarized Economies By Miguel A. Kiguel; Alain Ize; Eduardo Levy Yeyati
  100. Central Bank Independence and Inflation: The case of Greece By Theodore Panagiotidis; Afrodit Triampella
  101. The Role of Stock Markets in Current Account Dynamics: A Time Series Approach By Benoît Mercereau
  102. The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-wide Risk Transfer By Michael T. Gapen; Yingbin Xiao; Cheng Hoom Lim; Dale F. Gray
  103. Does the World Need a Universal Financial Institution? By James M. Boughton
  104. Bidder Participation and Information in Currency Auctions By Rafael Romeu; Lawrence Ausubel
  105. Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies By Inci Ötker; Paul Hilbers; Gudrun Johnsen; Ceyla Pazarbasioglu
  106. High-Order Consumption Moments and Asset Pricing By Andrei Semenov
  107. Prudential Responses to De Facto Dollarization By Andrew Powell; Alain Ize
  108. Do Local Analysts Know More? A Cross-Country Study of the Performance of Local Analysts and Foreign Analysts By Kee-Hong Bae; Rene M. Stulz; Hongping Tan
  109. Currency Crises in Developed and Emerging Market Economies: A Comparative Empirical Treatment By Thomson Fontaine
  110. Government Debt: A Key Role in Financial Intermediation By Michael Kumhof; Evan Tanner
  111. Will you Buy My Peg? The Credibility of a Fixed Exchange Rate Regime as a Determinant of Bilateral Trade By Emilia Magdalena Jurzyk; Bernhard Fritz-Krockow
  112. Choosing the Correct Currency Anchor For a Small Economy: The Case of Nepal By Sibel Yelten
  113. The Determinants of International Portfolio Holdings and Home Bias By Shujing Li; Isabel K. Yan; Hamid Faruqee
  114. Exchange Rate Regimes and Trade By Christopher Adam; David Cobham
  115. Cyclical Implications of Changing Bank Capital Requirements in a Macroeconomic Framework By Mario Catalán; Eduardo J.J. Ganapolsky
  116. Empirical Modeling of Contagion: A Review of Methodologies By Mardi Dungey; Renee Fry; Vance Martin; Brenda González-Hermosillo
  118. Imperfect Capital Mobility in an Open Economy Model of Capital Accumulation By Vladimir Klyuev
  119. Microfinance in Africa: Experience and Lessons from Selected African Countries By Rodolphe Blavy; Murat  Yülek; Anupam Basu
  120. Do Macroeconomic Effects of Capital Controls Vary by Their Type? Evidence from Malaysia By Natalia T. Tamirisa
  121. A Cross-Country Non-Parametric Analysis of Bahrain's Banking Sector By Vlad Manole; David A. Grigorian
  122. Central Bank Governance: A Survey of Boards and Management By JoAnne Morris; Tonny Lybek
  123. Financial Dollarization Equilibria: A Framework for Policy Analysis By Alain Ize
  124. Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER? By Ian Babetskii; Balazs Egert
  125. Quantitative Assessment of the Financial Sector: An Integrated Approach By DeLisle Worrell
  126. Exchange Rate Pass-Through in the Euro Area: The Role of Asymmetric Pricing Behavior By Hamid Faruqee
  127. Remoteness and Real Exchange Rate Volatility By Claudio Bravo-Ortega; Julian di Giovanni
  128. Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies By Emilio Sacerdoti
  129. Finance in Lower Income Countries: An Empirical Exploration By Thierry Tressel; Enrica Detragiache; Poonam Gupta
  130. Does Regulatory Governance Matter for Financial System Stability? An Empirical Analysis By Kina Chenard; Udaibir S. Das; Marc Quintyn
  131. Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean By Luis Ignacio Jácome; Francisco F. Vázquez
  132. Entry Costs and Stock Market Participation Over the Life Cycle By Sule Alan
  133. Financial Sector Development in the Middle East and North Africa By Rishi Goyal; A. Mushfiq Mobarak; Susan Creane; Randa Sab
  134. "Rules of Thumb" for Sovereign Debt Crises By Paolo Manasse; Nouriel Roubini
  135. Debt Maturity and the International Financial Architecture By Olivier Jeanne
  136. Exchange Rates in Central Europe: a Blessing or a Curse? By Alain Borghijs; Louis Kuijs
  137. New Rates from New Weights By Sarma Jayanthi; Tamim A. Bayoumi; Jaewoo Lee
  138. Solving General Equilibrium Models with Incomplete Markets and Many Assets By Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University)
  139. Financial Globalization and Exchange Rates By Gian Maria Milesi-Ferretti; Philip R. Lane
  140. Banking in Sub-Saharan Africa: What Went Wrong? By François Leroux; Roland Daumont; Françoise Le Gall
  141. Foreign Currency Deposits and International Liquidity Shortages in Pakistan By Abbas Mirakhor; Iqbal Mehdi Zaidi
  142. On Cyclicality in the Current and Financial Accounts: Evidence from Nine Industrial Countries By Jens R. Clausen; Magda E. Kandil
  143. Keeping Capital Flowing: The Role of the IMF By Ashoka Mody; Nienke Oomes; Michael D. Bordo
  144. The Late 1990s Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization at Work By Luis Ignacio Jácome
  145. Timing of International Bailouts By Se-Jik Kim
  146. Cataclysms and Currencies: Does The Exchange Rate Regime Matter for Real Shocks? By Rodney Ramcharan
  147. GRAMEEN BANK II. Una possibile analisi in prospettiva relazionale. By Tommaso Reggiani
  148. The IMF and the Force of History: Ten Events and Ten Ideas that Have Shaped the Institution By James M. Boughton
  149. Defining Financial Stability By Garry J. Schinasi
  150. Maintaining Competitiveness Under Equilibrium Real Appreciation: The Case of Slovakia By Nienke Oomes
  151. Regional Financial Conglomerates: A Case for Improved Supervision By Julia Majaha-Jartby; Thordur Olafsson
  152. How Stable is the Forecasting Performance of the Yield Curve for Outpot Growth? By Rossi, Barbara; Giacomini, Raffaella
  153. Exits from Heavily Managed Exchange Rate Regimes By Ashoka Mody; Eisuke Okada; Enrica Detragiache
  154. Toward a Framework for Safeguarding Financial Stability By Jan Kakes; Garry J. Schinasi; Aerdt G. F. J. Houben
  155. Capital Flows in a Globalized World: The Role of Policies and Institutions By Laura Alfaro; Sebnem Kalemli-Ozcan; Vadym Volosovych
  156. Deconstructing the Art of Central Banking By Silvia Sgherri; Tamim A. Bayoumi
  157. Trade Finance and Trade Flows: Panel Data Evidence from 10 Crises By Márcio Valério Ronci
  158. On The Relationship Between inflation and Stock Mark Votality By Alexandros Kontonikas, Alberto Montagnoli and Nicola Spagnolo
  159. State-Owned Banks, Stability, Privatization, and Growth: Practical Policy Decisions in a World Without Empirical Proof By Michael Andrews
  160. Eurosclerosis or Financial Collapse: Why Did Swedish Incomes Fall Behind? By Valerie Cerra; Sweta Chaman Saxena
  161. Does Compliance with Basel Core Principles Bring Any Measurable Benefits? By Richard Podpiera
  162. Interest Rate Volatility and Risk in Indian Banking By Ila Patnaik; Ajai Shah
  163. Sovereign Debt Defaults and Financing Needs By Mark Kruger; Miguel Messmacher
  164. Six Puzzles in Electronic Money and Banking By Saleh M. Nsouli; Connel Fullenkamp
  165. Can Debt Crises Be Self-Fulfilling? By Marcos Chamon
  166. Too Much of a Good Thing? Credit Booms in Transition Economies: The Cases of Bulgaria, Romania, and Ukraine By Nikolay Gueorguiev; Christoph Duenwald; Andrea Schaechter
  167. Historical Financing of Small- and Medium-Sized Enterprises By Robert Cull; Lance E. Davis; Naomi R. Lamoreaux; Jean-Laurent Rosenthal
  168. Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries By Vivian Z. Yue; Samir Jahjah
  169. Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005 By Jeromin Zettelmeyer; Federico Sturzenegger
  170. Quality of Financial Policies and Financial System Stress By Richard Podpiera; Dmitriy Rozhkov; Plamen Iossifov; Udaibir S. Das
  171. A Common Currency for Belarus and Russia? By Etibar Jafarov; Anne Marie Gulde; Vassili Prokopenko
  172. Stress Testing Financial Systems: What to Do When the Governor Calls By Paul Louis Ceriel Hilbers; Matthew T. Jones; Graham L. Slack
  173. How Do Trade and Financial Integration Affect the Relationship Between Growth and Volatility? By M. Ayhan Kose; Eswar Prasad; Marco Terrones
  174. Structural Reforms and the Exchange Rate Regime: A Panel Analysis for the World versus OECD Countries By Ansgar Belke; Bernhard Herz; Lukas Vogel
  175. Stochastic Pricing By Gerhard Schroeder
  176. Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? By Yin-Wong Cheung; Menzie David Chinn; Antonio Garcia Pascual

  1. By: Janet Kong; Manmohan Singh
    Abstract: This paper focuses on asset allocation decisions of life insurance companies in emerging markets. Mature market insurers allocate only a small fraction of their assets to emerging markets because of regulatory constraints, rating pressures, and currency risk. However, global insurers invest directly in emerging markets by setting up subsidiaries rather than through portfolio investment, and this trend is increasing. Local insurers largely remain captive investors of local instruments and provide stability to the domestic securities market. The regulatory regime and the liquidity and depth of local markets play an important role in asset allocation decisions of insurers. Insurance companies are increasingly adopting asset liability management and risk control measures. However, insufficiently developed local markets and regulatory interventions on the liabilities side often limit optimal asset allocation.
    Keywords: Insurance , Emerging markets , Liquidity , Financial crisis , Investment , Asset prices ,
    Date: 2005–05–13
  2. By: Jorge A. Chan Lau
    Abstract: This paper focuses on the investment behavior of pension funds in developed and emerging market countries. First, it analyzes the main determinants of the emerging market asset allocation of pension funds in developed countries. Second, it assesses how pension funds in emerging markets have contributed to the development of local securities markets. Third, it analyzes the determinants of pension funds' investment performance. The paper concludes with a discussion of why the emerging market asset allocation of pension funds in developed countries is likely to increase and what the challenges faced by pension funds in emerging markets are.
    Keywords: Pensions , Emerging markets , Financial assets , Pension regulations ,
    Date: 2004–10–12
  3. By: Christoph Klingen; Jeromin Zettelmeyer; Beatrice Weder
    Abstract: We estimate ex post returns to emerging market debt by combining secondary-market prices with observed flows based on World Bank data. From 1970-2000, returns averaged 9 percent per annum, about the same as returns on a ten-year U.S. treasury bond. This reflects the combined effect of the 1980s debt crisis and much higher returns during 1989-2000. Annual returns since 1986 have been less volatile than emerging market equity returns but more volatile than returns on U.S. corporate or high-yield bonds. However, unlike returns on these bonds, emerging market debt returns do not seem significantly correlated with U.S. or world stock markets.
    Keywords: Debt , Capital flows , emerging markets ,
    Date: 2004–02–09
  4. By: Li L. Ong; Amadou N. R. Sy
    Abstract: The expansion of the global mutual funds industry has been characterized by growth in mature as well as emerging markets. This has clearly contributed to the development of local securities markets in emerging market economies, which in turn, has been key in attracting investment inflows from overseas funds. A major concern, however, is that large foreign investors could significantly disrupt the stability of local capital markets in the event of a market shock, with systemic implications for the real economy. Our estimates suggest that while local investors remain the more important group in terms of market share, the influence of foreign funds cannot be discounted. Asset allocation decisions by mature market funds- both dedicated and crossover-in aggregate, could affect emerging markets. In particular, European mutual funds appear to play a much bigger role in emerging markets than their U.S. counterparts.
    Keywords: Emerging markets , Capital markets , Bond markets , External debt , Stock markets ,
    Date: 2004–08–11
  5. By: Marco Del Negro; Robin Brooks
    Abstract: We estimate a latent factor model that decomposes international stock returns into global, country-, and industry-specific shocks and allows for stock-specific exposures to these shocks. We find that across stocks there is substantial dispersion in these exposures, which is partly explained by the extent to which firms operate across countries. We show that portfolios consisting of stocks with low exposures to country shocks achieve substantial variance reduction relative to the global market, both in- and out-of-sample. The shock exposures are thus a stock-selection device for international portfolio diversification.
    Keywords: Globalization , International capital markets , Risk premium , Export diversification , Industrialization , Stock markets , Economic models ,
    Date: 2005–03–21
  6. By: Arnaud Jobert; Janet Kong; Jorge A. Chan-Lau
    Abstract: We measure bank vulnerability in emerging markets using the distance-to-default, a risk-neutral indicator based on Merton's (1974) structural model of credit risk. The indicator is estimated using equity prices and balance-sheet data for 38 banks in 14 emerging market countries. Results show it can predict a bank's credit deterioration up to nine months in advance. The distance-to-default, hence, may prove useful for bank monitoring purposes.
    Keywords: Banks , Emerging markets , Financial crisis ,
    Date: 2004–03–09
  7. By: Yoon-suh Kim; Jorge A. Chan-Lau
    Abstract: This paper examines equilibrium price relationships and price discovery between credit defaul swap (CDS), bond, and equity markets for emerging market sovereign issuers. Findings suggest that CDS and bond spreads converge despite various pressures that arise in the market. In most countries, however, we do not find any equilibrium price relationship between the bond and CDS markets and the equity markets. As for price discovery, our results are mixed. This stands in contrast to the empirical findings on corporate issuers in the United States and Europe.
    Keywords: Stock markets , Credit , Bonds , Emerging markets , Economic models ,
    Date: 2004–03–02
  8. By: Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University) (Department of Economics, Georgetown University)
    Abstract: International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the behavior of international capital flows and financial returns. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows fall dramatically but continue to exceed the size and volatility of international equity flows. This is the natural outcome of greater risk sharing facilitated by increased integration. We find that the equilibrium flows in bonds and stocks are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The paper also makes a methodological contribution to the literature on dynamic general equilibrium asset-pricing. We implement a new technique for solving a dynamic general equilibrium model with production, portfolio choice and incomplete markets. Classification-JEL Codes: D52; F36; G11.
    Keywords: Globalization; Portfolio Choice; Financial Integration; Incomplete Markets; Asset Prices.
  9. By: Li L. Ong; Jorge A. Chan-Lau
    Abstract: Do the dynamics of net flows to U.S. retail mutual funds affect equity returns in emerging markets? The question merits further examination since retail investors in mutual funds can exert a much greater degree of "control" over these funds via cash injections or redemptions at any time. A VAR analysis shows increased discrimination across emerging market regions after the Asian crisis as investors focused on individual regions rather than on emerging markets as a generic asset class. Crossover funds allocations also appear to affect emerging market returns. Furthermore, investment decisions by fund managers seem to be largely driven by retail investor allocations.
    Date: 2005–08–19
  10. By: Kazunari Ohashi; Manmohan Singh
    Abstract: Sizable risk capital from outside may be necessary to accelerate Japan's corporate restructuring to replace the stock of impaired bank loans. To attract risk capital, impaired loans must find market-clearing prices. However, the asymmetry in the bid-ask prices faced by banks and distressed-debt investors continues to stall efforts to create a liquid distressed-debt market. This paper asserts that the wedge between the prices faced by different participants is primarily a result of different valuation methods employed by banks and distressed-debt investors. On the one hand, banks do not recognize "maturity default" that results in banks rolling over impaired-loan accounts, effectively turning them into perpetual debt, which is expected to capture any upside potential for value. On the other hand, distressed-debt investors presently view their investments as equity stakes that require improved cash flows, unlike the buy-and-sell distressed-collateral market that existed in the mid-1990s. We suggest that bids from distressed-debt investors may not be as low as they are deemed by local banks and the asymmetry in prices may be reduced if banks value their claims as corporate equity.
    Keywords: Debt , Japan , Emerging markets , Debt restructuring ,
    Date: 2004–06–10
  11. By: Andrew Swiston
    Abstract: This paper analyzes various indicators of the U.S. international investment position from a portfolio perspective. The 1990s saw a decline in home bias, which, coupled with rapid financial deepening, led to a large increase in gross international investment holdings. The home bias of non-U.S. investors declined more rapidly than that of U.S. investors, allowing the United States to finance a rising stock of net liabilities, even as foreign portfolios remained marketweight or underweight U.S. assets in each investment category. However, a comparison to other countries reveals that the U.S. net international investment position (NIIP) is large given the size of the economy and is deteriorating, especially through a growing negative net debt securities position.
    Keywords: Foreign investment , United States , External debt ,
    Date: 2005–09–23
  12. By: Noureddine Krichene
    Abstract: Option prices provide valuable information on market expectations. This paper attempts to extract market expectations, as conveyed by an implied risk-neutral probability distribution, from option prices for the dollar-euro exchange rate. Returns' volatilities are inferred from observed and interpolated option prices. To address robustness, two distributions, one from actual data and the other from interpolated data, were computed. The main conclusion of the paper is that traders have wide-ranging expectations, and large movements in either direction would not occur as a surprise. The main implication for monetary policy is that should markets become too volatile, then intervention may be required.
    Keywords: Emerging markets , Euro , U.S. dollar , Exchange rates , Prices , Economic models ,
    Date: 2004–10–22
  13. By: Rafael Romeu
    Abstract: This study addresses the empirical viability of microstructure models of dealer price setting. New evidence is presented rejecting these models' specifications of how information asymmetry and inventory accumulation affect dealer pricing. This rejection is consistent with those of other dealer-level empirical studies. This study suggests a new modeling option may be to reconsider optimal price setting while relaxing assumptions that specify incoming orders as the only component through which dealer inventories evolve. This approach is consistent with inventory evolution data and with general equilibrium models' assumptions about currency markets.
    Keywords: Exchange markets , Economic models ,
    Date: 2004–01–28
  14. By: Enrica Detragiache; Poonam Gupta
    Abstract: Foreign banks have greatly increased their presence in emerging market countries in recent years. This paper compares the performance of domestic banks and a long-established group of foreign banks during the recent crisis in Malaysia. We find that the sharpest differences are between banks mainly active in Asia (including all domestic and some foreign banks) and foreign banks not specialized in Asia. The latter group performed better than the rest during the crisis, maintaining higher profitability thanks to higher interest margins and lower nonperforming loans. Foreign banks did not abandon the local market during the crisis and received less government support than domestic institutions.
    Keywords: Banks , Malaysia , Emerging markets , Banking systems , Financial crisis , Economic models ,
    Date: 2004–08–03
  15. By: Tito Cordella; Eduardo Levy Yeyati
    Abstract: To cope with the self-fulfilling liquidity runs that triggered many recent financial crises, we propose the creation of a country insurance facility. The facility, which we envisage as complementary to the existing multilateral lending facilities, would provide eligible countries with automatic access to a credit line at a predetermined interest rate. Eligibility criteria should be easily verifiable, focus on debt sustainability, and take into account the currency and maturity composition of the debt. Other critical design issues considered here include the size of the facility, its duration and charges, and the exit costs for a country that loses eligibility.
    Keywords: Insurance , Liquidity , Financial crisis , International financial system , International Capital Markets ,
    Date: 2005–02–11
  16. By: Noureddine Krichene
    Abstract: One approach to oil markets is to treat oil as an asset, besides its role as a commodity. Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices. This paper recognizes both the consumption and investment aspects of crude oil and proposes Levy processes for modeling uncertainty and options pricing. Calibration to crude oil futures' options shows high volatility of oil futures prices, fat-tailed, and right-skewed market expectations, implying a higher probability mass on crude oil prices remaining above the futures' level. These findings support the view that demand for futures contracts by investors could lead to excessively high price volatility.
    Date: 2005–09–14
  17. By: John Cady
    Abstract: Does macroeconomic data transparency-as signaled by subscription to the IMF's Special Data Dissemination Standard (SDDS)-help reduce borrowing costs in private capital markets? This question is examined using detailed data on new issues of sovereign foreign currency-denominated (U.S. dollar, yen, and euro) bonds for several emerging market economies. Panel econometric estimates indicate that spreads on new bond issues declined by about 75 basis points following SDDS subscription.
    Keywords: Public debt , Emerging markets , International capital markets , External borrowing , Data analysis , Bond issues , Transparency , Standards and codes , Special Data Dissemination Standard ,
    Date: 2004–04–22
  18. By: Jochen R. Andritzky; Manmohan Singh
    Abstract: Since recent debt restructurings that constitute credit events have been more frequent than outright defaults, sovereign bond prices may not collapse during distress. In this case, the likely high recovery values after restructuring suggest that the cost of credit-default-swap (CDS) contracts to the buyer (as measured by CDS spreads) may be higher than warranted. We estimate the extent of such overpricing by using the cheapest-to-deliver (CTD) bond as a proxy for the recovery-value assumption.
    Date: 2005–07–05
  19. By: Inwon Song
    Abstract: The increased presence of foreign banks in a country's domestic banking system necessitates the development of effective cross-border prudential supervision where the consolidated supervision is the essential element. This paper presents foreign bank supervision in terms of division of responsibilities between the home and host countries, consolidated supervision, quality of home-country supervision, memoranda of understanding (MOUs), and "ringfencing" of banks. A number of challenges which foreign banks bring to emerging market banking supervisors are also discussed. The paper also provides surveys of country cases.
    Keywords: Bank Supervision , International banking , Emerging markets , Financial sector ,
    Date: 2004–06–01
  20. By: Wilko Bolt; Alexander F. Tieman
    Abstract: In a dynamic theoretical framework, commercial banks compete for customers by setting acceptance criteria for granting loans, taking regulatory requirements into account. By easing its acceptance criteria a bank faces a trade-off between attracting more demand for loans, thus making higher per period profits, and a deterioration of the quality of its loan portfolio, thus tolerating a higher risk of failure. Our main results state that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria, and that increased competition in the banking industry leads to riskier bank behavior. In an extension of our basic model, we show that it may be beneficial for a bank to hold more equity than prescribed by the regulator, even though holding equity is more expensive than attracting deposits.
    Keywords: Banking , Competition , Bank regulations , Capital ,
    Date: 2004–02–05
  21. By: Jorge A. Chan-Lau
    Abstract: Policy makers have expressed interest in fostering the development of local foreign exchange derivatives markets with a view to reducing risks arising from currency mismatches between assets and liabilities in the corporate sector. This paper assesses foreign exchange exposure in the corporate sector in Chile, analyzes the current state of the foreign exchange derivatives market in Chile, and argues that liquid and developed foreign exchange derivatives markets can help promote financial stability.
    Keywords: Foreign exchange , Chile , Markets , Currencies ,
    Date: 2005–03–04
  22. By: Anna Ilyina
    Abstract: The objectives of this paper are: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a "volatility shock" in one of the asset markets, under sufficiently realistic assumptions about the fund manager's performance criteria and investment restrictions; and (2) to analyze the sensitivity of the equilibrium price of an asset to shocks originating in other fundamentally unrelated asset markets for a given mix of common investors. The analysis confirms that certain combinations of investment restrictions (notably short-sale constraints and benchmark-based performance criteria) can create additional transmission mechanisms for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and on-going changes in the investor base for emerging market securities for the asset price volatility.
    Date: 2005–10–06
  23. By: Ivan Tchakarov; Selim Elekdag
    Abstract: The debate about the appropriate choice of exchange rate regime is fundamental in international economics. This paper develops a small open-economy model with balance sheet effects and compares the performance of fixed and flexible exchange rate regimes. The model is solved up to a second-order approximation which allows us to address the issue of risk and welfare rigorously. The paper identifies threshold levels of the debt-to-GDP ratio above which fixed exchange rate regimes are welfare superior to monetary policy rules that imply flexible exchange rate regimes. The results suggest that emerging market economies that suffer from a relatively high level of indebtedness and are constrained in their pursuit of optimal monetary policy, could find it beneficial to opt for a fixed exchange rate regime.
    Keywords: Exchange rate policy , Capital markets , Economic models ,
    Date: 2004–04–26
  24. By: Ashoka Mody; Se-Jik Kim
    Abstract: In a rational-expectations framework, we model depositors' confidence as a function of the probability of future bank bailouts. We analyze the effect of alternative bank bailout policies on depositors' confidence in an emerging market setting, where liquidity shortages of banks are revealed sequentially and governments cannot credibly commit to bailing out all potentially distressed banks. Our findings suggest that allowing early bank failures and using available liquidity for credible commitments to later bailouts can better boost confidence than early bailouts. This conclusion arises because with a high chance of liquidity shortage in the future, depositors may lose confidence and hence withdraw deposits even from potentially sound banks. Such a policy of late bailouts is likely to receive political support when a full bailout needs to be financed by taxation. The logic of late bailout remains valid even when banks may hide their distress or when closures of early distressed banks create contagion.
    Keywords: Banks , Liquidity management , Emerging markets ,
    Date: 2005–01–04
  25. By: Amadou N. R. Sy
    Abstract: The large holdings of government securities by banks in India draw attention to their risk as interest rates are at historical low levels. This paper measures such a risk using duration and value-at-risk methods and assesses its current management by banks. The main finding is that some public sector and old private banks are vulnerable to a reversal of the interest rate cycle, while foreign and new private banks have built adequate defenses. In this regard, the paper makes a number of recommendations regarding government policies and individual bank practices to manage interest rate risk.
    Keywords: Interest rates , India , Banks , Risk premium , Bonds , Basel Core Principles ,
    Date: 2005–04–28
  26. By: Marco Arnone; Luca Bandiera
    Abstract: Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy.
    Keywords: Money , Monetary policy , Monetary unions , Monetary operations ,
    Date: 2004–07–28
  27. By: John W. Dalton; Claudia Helene Dziobek
    Abstract: Under normal circumstances, a central bank should be able to operate at a profit with a core level of earnings derived from seigniorage. Losses have, however, arisen in several central banks from a range of activities including monetary operations under extreme conditions and financial sector restructuring. The paper discusses the impact of losses on central bank operations and lays out the principles and practices for handling central bank losses. It is suggested that losses should be disclosed as a reduction of the central bank's net worth unless covered by the government. Governments may cover losses through recapitalization of the central bank, and this will create a new central bank asset, usually in the form of government securities held by the central bank. Six case studies illustrate the circumstances under which losses may arise, their coverage, and central banks' disclosure practices.
    Keywords: Central banks , Brazil , Chile , Czech Republic , Hungary , Korea, Republic of , Thailand , Currency issuance ,
    Date: 2005–04–19
  28. By: Abdul Abiad; Nienke Oomes; Kenichi Ueda
    Abstract: The study documents evidence of a "quality effect" of financial liberalization on allocative efficiency, which is measured by the dispersion in Tobin's Q across firms. Based on a simple model, the authors predict that financial liberalization, by equalizing access to credit, reduces the variation in expected marginal returns. They test this prediction using a new financial liberalization index and firm-level data for five emerging markets: India, Jordan, Korea, Malaysia, and Thailand. They find strong evidence that financial liberalization, rather than financial deepening, improves allocative efficiency.
    Keywords: Capital , India , Jordan , Korea, Republic of , Malaysia , Thailand , Investment , Credit , Financial systems , Emerging markets , Forecasting models ,
    Date: 2004–07–20
  29. By: Dalia Marin; Haizhou Huang; Chenggang Xu
    Abstract: This paper provides a unified analysis for the onset of the 1998 financial crisis and the strong economic recovery afterward in Russia and other former Soviet Union countries. Before the crisis a banking failure arose owing to the coexistence of a lemons credit market and high government borrowing. In a lemons credit market low credit risk firms switched from bank to nonbank finance, including trade credits and barter trade, generating an externality on banks' interest rates. The collapse of the treasury bills market in the financial crisis triggered a change in banks' lending behavior, providing initial conditions for banking development.
    Keywords: Financial crisis , Russian Federation , Ukraine , Former Soviet Union , Banking , Economic models ,
    Date: 2004–07–12
  30. By: Raghuram Rajan; Giovanni Dell'Ariccia; Enrica Detragiache
    Abstract: Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank-dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises have been more severe.
    Keywords: Financial crisis , Banking systems , Insolvency , Bank resolution ,
    Date: 2005–03–29
  31. By: Pablo Druck; Raul Susmel; Ritu Basu; David Marston
    Abstract: We examine a large panel of more than 100 banks from Argentina to study the effects of bank consolidation on performance between December 1995 and December 2000, a period of heavy bank consolidation and relative calm. Overall, we find a positive and significant effect of bank consolidation on bank performance. Bank returns increase with consolidation, and insolvency risk is reduced. Additionally, the study suggests that mergers and privatizations have a beneficial effect on bank returns. The effects of a bank acquisition on return on equity is, however, negative. Acquisitions do not seem to have any effect on risk-adjusted returns. The study also finds that a bank's insolvency risk is reduced significantly through mergers and privatization and is unrelated to bank acquisitions.
    Keywords: Banking , Argentina , Emerging markets , Bank restructuring , Financial crisis , Privatization , Economic models ,
    Date: 2004–08–24
  32. By: Jochen R. Andritzky; Geoffrey J. Bannister; Natalia T. Tamirisa
    Abstract: This paper examines how emerging bond markets react to macroeconomic announcements. Global bond spreads respond to rating actions and changes in global interest rates rather than domestic data and policy announcements. All announcements affect market volatility. Data and policy announcements reduce uncertainty and stabilize the trading environment, while rating actions cause greater volatility. Results are broadly robust to country-specific and panel analyses, assuming conditional variance and controlling for the surprise content of news. In subsamples, announcements are found to matter less for countries with more transparent policies and higher credit ratings. In a crisis, rating actions become less important, and investors focus more on simple and timely indicators, like CPI.
    Keywords: Announcements , Emerging markets , Bonds , Financial crisis ,
    Date: 2005–05–05
  33. By: A. Prasad; Saibal Ghosh
    Abstract: It is widely perceived that competition in the Indian banking sector has increased since the inception of the financial sector reforms in 1992. Using annual data on scheduled commercial banks for the period 1996-2004, the paper evaluates the validity of this claim in the Indian context. The empirical evidence reveals that the Indian banking system operates under competitive conditions and earns revenues as if under monopolistic competition.
    Keywords: Competition , Banking , India , Bank reforms ,
    Date: 2005–07–28
  34. By: Agustin Carstens; Luis Ignacio Jácome H.
    Abstract: This study takes stock of the institutional reform of monetary policy in Latin America since the early 1990s. It argues that strengthening the legal independence of central banks, together with macroeconomic policies, was instrumental in reducing inflation from three-digit annual rates in the 1990s to single-digit territory in 2004. The paper also discusses the main challenges of monetary policy today, namely, achieving price stability, restoring market confidence in domestic currencies, and sticking to policy consistency despite adverse effects of the volatility of capital flows. Finally, recurrent banking crises and lack of fiscal discipline are identified as the main risks for the success of monetary policy in Latin America.
    Keywords: Inflation , Latin America , Bank reforms , Monetary policy ,
    Date: 2005–06–16
  35. By: Kala Krishna; Susumu Imai; Abhiroop Mukhopadhyay; Ling Hui Tan
    Abstract: This paper examines the role of middlemen (brokers) in an imperfect secondary market for quota licenses. Middlemen facilitate trade when markets are thin, as potential buyers and sellers find it difficult to meet and transact directly. However, in thin markets, middlemen also have the ability to influence the terms on which trades occur, and the wedge they create between the buying and selling price limits the extent to which they facilitate trade. We develop and simulate a model of quota broker behavior to examine their welfare implications.
    Keywords: Import quotas , Trade , Economic models ,
    Date: 2004–10–07
  36. By: Gilda Fernandez; Cem Karacadag; Rupa Duttagupta
    Abstract: This paper identifies the institutional and operational requisites for transitions to floating exchange rate regimes. In particular, it explores key issues underlying the transition, including developing a deep and liquid foreign exchange market, formulating intervention policies consistent with the new regime, establishing an alternative nominal anchor in the context of a new monetary policy framework, and building the capacity of market participants to manage exchange rate risks and of supervisory authorities to regulate and monitor them. It also assesses the factors that influence the pace of exit and the appropriate sequencing of exchange rate flexibility and capital account liberalization.
    Keywords: Exchange rate policy , Foreign exchange , Exchange markets , Intervention , Capital account liberalization , Flexible exchange rate policy ,
    Date: 2004–07–29
  37. By: Richard Podpiera; Martin Cihák
    Abstract: We analyze the structure, performance, and role of banking systems in the three member countries of the East African Community-Kenya, Tanzania, and Uganda-against the backdrop of recent financial sector reforms. Focusing on the behavior of different types of banks, we find no support for the argument that the presence of large international banks would have an adverse effect on the effectiveness and efficiency of banking sectors in developing countries. International banks are generally more efficient and more active in lending than domestic banks. However, as suggested by the Kenyan experience, the presence of international banks may not lead to increased competition and provision of banking services if weak institutions are allowed to remain in the system.
    Date: 2005–07–14
  38. By: Johan Mathisen; Thierry D. Buchs
    Abstract: This paper assesses the degree of bank competition and discusses efficiency with regard to banks' financial intermediation in Ghana. By applying panel data to variables derived from a theoretical model, we find evidence for a noncompetitive market structure in the Ghanaian banking system, which may be hampering financial intermediation. We argue that the structure, as well as the other market characteristics, constitutes an indirect barrier to entry thereby shielding the large profits in the Ghanaian banking system.
    Keywords: Competition , Banking , Ghana , Economic models ,
    Date: 2005–02–03
  39. By: David Cook; Woon Gyu Choi
    Abstract: In a liquid financial market, investors are able to sell large blocks of assets without substantially changing the price. We document a steep drop in the liquidity of the Japanese stock market in the post-bubble period and a steep rise in liquidity risk. We find that, during Japan's deflationary period, firms with more liquid balance sheets were less exposed to stock market liquidity risk, while slowly growing firms were highly exposed to liquidity shocks. Also, aggregate liquidity had macroeconomic effects on aggregate demand through its effect on money demand.
    Keywords: Stock markets , Japan , Liquidity , Demand ,
    Date: 2005–01–26
  40. By: Li L. Ong; Pipat Luengnaruemitchai
    Abstract: The objective of this paper is to discuss the key issues relating to the development of local corporate bond markets. We examine the requirements for local corporate bond market development, and compare and contrast experiences across both mature and emerging markets. We suggest that core aspects such as benchmarking, corporate governance and disclosure, credit risk pricing, the availability of reliable trading systems, and the development of hedging instruments are fundamental for improving the breadth and depth of corporate debt markets. The demand and supply of corporate bonds are dependent on factors such as the investor base, both local and foreign, and government policies toward the issuance process and associated costs, as well as the taxation regime. The sequencing of reforms is key to market development.
    Date: 2005–08–10
  41. By: Etienne B. Yehoue
    Abstract: This paper explores income and consumption smoothing patterns among the member countries of each of the CFA zones-the CEMAC2 and the WAEMU3-during the period 1980-2000. I find that for the CEMAC, only about 15 percent of shocks to GDP are smoothed through the standard channels (that is, capital market, credit market, and remittances). On the other hand, I find that 44 percent of shocks are smoothed via foreign aid from France, and 5 percent via central bank contributions, while reserves pooling provides no shock smoothing. For the WAEMU, I find that only 13 percent of shocks are smoothed through the standard channels, while 63 percent are smoothed via foreign aid from France, 7 percent via central bank contributions, and no smoothing via reserves pooling. I compare these results with the risksharing pattern in the Unites States. I argue that creating public venture capital at a regional level might help promote free capital flows within each zone and alleviate the apparently insufficient degree of risk-sharing observed through the standard channels.
    Date: 2005–05–24
  42. By: Mark R. Stone; E. P. Davis
    Abstract: This paper uses flow-of-funds and balance sheet data to analyze the impact of financial crises on corporate financing and GDP in a range of countries. Post-crisis GDP contractions are mainly accounted for by declines in investment and inventory and are more severe for emerging market countries. Post-crisis investment and inventory declines are correlated with the corporate debtequity ratio. Although companies in emerging market countries hold more liquidity, this is not sufficient to prevent a greater response of expenditures to shocks. Industrial countries appear to benefit from an offsetting increase in bond issuance.
    Keywords: Financial crisis , Emerging markets , Financial stability , Gross domestic product ,
    Date: 2004–07–29
  43. By: Selin Sayek; Hyoung Goo Kang; Alexander Lehmann
    Abstract: We use data on the sources of debt finance of U.S. majority-owned foreign affiliates in 53 countries over the period 1983 to 2001 to examine the role of financial market development, and exposure to host country-specific risk on the financing choices of these affiliates. We find that total balance sheets are about four times as large as the cross-border component of foreign direct investment (FDI). The extent of financial leverage through local debt is positively related to host-country corporate tax rates, exchange rate variability, local currency-denominated sales, and financial development. Factors that further the role of local debt reduce that of parent company debt, and through this substitution overall leverage increases.
    Keywords: Foreign investment , United States , Debt refinancing , Domestic debt , Capital markets , International financial system , Data analysis , Tax rates , Exchange rate variability ,
    Date: 2004–07–13
  44. By: Jorge Iván Canales Kriljenko
    Abstract: The foreign exchange market microstructures in developing and transition economies are characterized by the results from the IMF's 2001 Survey on Foreign Exchange Market Organization. The survey found that these markets are usually unified onshore spot markets for U.S. dollars, where transactions are concentrated at the bank-customer level. The trading mechanisms are usually dealer or mixed dealer/auction markets; the degree of transparency is often low; settlement systems remain risky; and the scope for price discovery is variable.
    Keywords: Exchange markets , Developing countries , Transition economies ,
    Date: 2004–01–27
  45. By: Dalia Hakura
    Abstract: The paper finds that exchange rate flexibility in emerging market countries has increased over the past decade. This "learning to float" appears to have involved a strengthening of monetary and financial policy frameworks aimed at directly addressing the key vulnerabilities that give rise to the "fear of floating." The results in the paper suggest that the trend toward greater exchange rate flexibility, alongside a strengthening of banking supervision, has afforded emerging market countries more monetary policy independence.
    Keywords: Emerging markets , Developed countries , Floating exchange rates , Monetary policy ,
    Date: 2005–06–01
  46. By: Romain Ranciere; Norman Loayza
    Abstract: This paper studies the apparent contradictions between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measured by, for instance, private domestic credit and liquid liabilities. On the other hand, the banking and currency crisis literature finds that monetary aggregates, such as domestic credit, are among the best predictors of crises and their related economic downturns. This paper accounts for these contrasting effects based on the distinction between the short- and long-run effects of financial intermediation.
    Keywords: Financial crisis , Economic growth ,
    Date: 2005–09–08
  47. By: S. Beidas; Magda E. Kandil
    Abstract: This paper sheds light on the quantitative behavioral responses of key economic variables in the Palestinian economy in the face of major economic shocks and draws implications for the choice of an exchange rate regime should a decision be taken to introduce a national currency. Time-series regression analysis shows that (i) wages and prices are flexible in the face of various shocks; (ii) the real wage appears rigid in the face of various shocks and increases despite higher unemployment; (iii) an appreciation of the new Israeli Sheqalim real effective exchange rate decreases exports and imports; and (iv) money demand appears stable in the face of exchange rate shocks. Although a fixed exchange rate system may initially be desirable to establish credibility of the new currency, some flexibility of the exchange rate is desirable over time.
    Keywords: Exchange rate regimes , West Bank and Gaza Strip , Currencies , Currency substitution ,
    Date: 2005–04–15
  48. By: Ivan Tchakarov; Selim Elekdag; Alejandro Justiniano
    Abstract: This paper develops a small open economy model where entrepreneurs partially finance investment using foreign currency denominated debt subject to a risk premium above and beyond international interest rates. We use Bayesian estimation techniques to evaluate the importance of balance sheet vulnerabilities combined with the presence of the financial accelerator for emerging market countries. Using Korean data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, our estimates of the Taylor rule imply a strong preference to smooth both exchange rate and interest rate fluctuations.
    Keywords: Financial sector , Current account , Exchange rates , Savings , Economic models ,
    Date: 2005–03–14
  49. By: Jacqueline Irving
    Abstract: This paper assesses whether regional cooperation and integration of stock exchanges in eastern and southern Africa could offer a way of overcoming impediments to the exchanges' development. The paper concludes that regional cooperation and, at a later stage, integration, if carried out at the right pace and in a pragmatic way, could improve the liquidity, efficiency, and competitiveness of these exchanges. Further progress in developing national financial markets must precede any actual moves to integrate securities markets. These exchanges could meanwhile benefit from closer cooperation, including by encouraging more crossborder listings and information/technology sharing.
    Date: 2005–07–01
  50. By: Elina Ribakova
    Abstract: While deregulated financial markets and strong competition are commonly viewed as prerequisites for successful economic development, recent empirical evidence suggests that financial liberalization, if not well phased, can lead to costly financial crises. This paper focuses on the roles of minimum capital requirements and prudential supervision in promoting financial stability during financial liberalization. The paper extends the Hellmann, Murdock, and Stiglitz model to analyze the effects of prudential supervision and demonstrates the trade-off between the quality of supervision and the level of minimum capital requirements. Where prudential supervision is poor, higher capital requirements are optimal.
    Keywords: Bank supervision , Capital , Financial systems , Financial stability , Financial crisis , Economic models ,
    Date: 2005–07–21
  51. By: Ádám Kóbor; István P. Székely
    Abstract: The paper analyzes foreign exchange market volatility in four Central European EU accession countries in 2001-2003. By using a Markov regime-switching model, it identifies two regimes representing high- and low-volatility periods. The estimation results show not only that volatilities are different between the two regimes but also that some of the cross-correlations differ. Notably, cross-correlations increase substantially for two pairs of currencies (the Hungarian forint-Polish zloty and the Czech koruna-Slovak koruna) in the high-volatility period. The paper concludes by discussing the policy implications of these findings.
    Keywords: Exchange markets , Czech Republic , Hungary , Poland , Slovak Republic , Euro , Economic models ,
    Date: 2004–02–10
  52. By: Tao Wang
    Abstract: This paper reviews the evolution of China's real effective exchange rate between 1980 and 2002, and uses a structural vector autoregression model to study the relative importance of different types of macroeconomic shocks for fluctuations in the real exchange rate. The structural decomposition shows that relative real demand and supply shocks account for most of the variations in real exchange rate changes during the estimation period. The paper also finds that supply shocks are as important as nominal shocks in accounting for real exchange rate fluctuations, in contrast with other studies that show that, in industrial countries, nominal shocks are more important in explaining real exchange rate fluctuations.
    Keywords: Real effective exchange rates , China ,
    Date: 2004–02–17
  53. By: Peter N. Ireland (Boston College)
    Abstract: The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment.  Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets.  Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models.
    Keywords: Monetary transmission mechanism
    JEL: E52
    Date: 2005–10–19
  54. By: Stefan W. Schmitz
    Abstract: The following study analyzes the impact of demographic developments in Austria on the long-term average real interest rate, funded pension provision and the implications of demographic developments for the stability of the financial system. The key results of this study are twofold: (1) Households' net supply of savings and the demand for capital by the corporate sector both need to be integrated into the empirical and theoretical analysis of the impact of demographic developments on financial markets. (2) In addition, funded pension provision is exposed to demographic risks.
    Keywords: Demographic change, aging, funded pensions, financial stability
    JEL: G G J
    Date: 2005–10–18
  55. By: Aude Pommeret; Anne Epaulard
    Abstract: The aim of this paper is to evaluate the welfare gains from financial integration for developing and emerging market economies. To do so, we build a stochastic endogenous growth model for a small open economy that can (i) borrow from the rest of the world, (ii) invest in foreign assets, and (iii) receive foreign direct investment (FDI). The model is calibrated on 32 emerging market and developing economies for which we evaluate the upper bound for the welfare gain from financial integration. For plausible values of preference parameters and actual levels of financial integration, the mean welfare gain from financial integration is about 10 percent of initial wealth. Compared with financial autarky, actual levels of financial integration translate into slightly higher annual growth rates (around 0.4 percentage point per year.)
    Keywords: Economic growth , Emerging markets , Foreign investment , Economic models ,
    Date: 2005–04–12
  56. By: Andrés Arias; Lei Zhang; A. Javier Hamann
    Abstract: Based on the observed behavior of monetary aggregates and exchange rates, we classify inflation-stabilization episodes into two categories: de facto exchange rate-based stabilizations (ERBS) and non-ERBS. Unlike the standard de jure ERBS studied in the literature, de facto ERBS encompass cases in which the central bank intervenes in the foreign exchange market but does not preannounce the use of an exchange rate anchor. The number of the de facto ERBS is twice as large as that of de jure ERBS. Output dynamics during disinflation do not differ significantly between these two groups. We conclude that empirical studies on the effects of exchange rate anchors must seek to disentangle the effects of their announcement from those related to their role in the remonetization process.
    Keywords: Monetary policy , Disinflation , Exchange rates , Economic stabilization ,
    Date: 2005–03–01
  57. By: Tihomir Stucka
    Abstract: A reduced-form model approach was used to estimate the trade balance response to permanent domestic currency depreciation. For this purpose, long-run and short-run effects were estimated, using three modeling methods along with two real effective exchange rate measures. On average, a 1 percent permanent depreciation improves the equilibrium trade balance by between 0.94 percent and 1.3 percent. The new equilibrium is established after approximately 2.5 years. Evidence of the J-curve is also found. Overall, in the light of the results obtained, it is questionable whether permanent depreciation is desirable to improve the trade balance, taking into account potential adverse effects on the rest of the economy.
    Keywords: Balance of trade , Croatia , Exchange rate depreciation , Exchange rate adjustments , Transition economies , Trade models , Economic models ,
    Date: 2004–05–10
  58. By: Hamerle, Alfred; Knapp, Michael; Wildenauer, Nicole
    Abstract: Im vorliegenden Beitrag wird untersucht, wie die Assetkorrelation zwischen zwei Sektoren auf einfache Weise berechnet werden kann und wie sich unterschiedliche Korrelationsannahmen auf die Form und Risikomaße von Verlustverteilungen auswirken. Dazu werden Ausfallzeitreihen von zwei us-amerikanischen Sektoren untersucht. Zum einen wird das Segment „Industrieunternehmen“ und zum anderen das Retailsegment „Kreditkarten“ betrachtet. Es wird gezeigt, wie unter Verwendung eines dynamischen Modells die Schuldnerbonität bzw. die Ausfallwahrscheinlichkeit unter Einbeziehung schuldnerspezifischer und makroökonomischer Faktoren geschätzt werden kann. Es stellt sich heraus, dass durch die Einbeziehung vor allem makroökonomischer Größen die Ausfallwahrscheinlichkeit „Point in Time“ prognostiziert und sowohl die Assetkorrelation innerhalb eines Sektors bzw. Risikosegments als auch die intersektorale Korrelation verringert werden können. Dies führt im Allgemeinen zu präziseren Prognosen der Verlustverteilungen.
    Keywords: Probability of Default, asset correlation, default correlation, credit risk, credit risk management
    JEL: G21 C1
    Date: 2005–10–18
  59. By: Jorge Iván Canales Kriljenko; Karl Friedrich Habermeier
    Abstract: The paper examines factors affecting exchange rate volatility, with an emphasis on structural features of the foreign exchange regime. It draws for the first time on detailed survey data collected by the IMF on foreign exchange market organization and regulations. Key findings are that decentralized dealer markets, regulations on the use of domestic currency by nonresidents, acceptance of Article VIII obligations, and limits on banks' foreign exchange positions are associated with lower exchange rate volatility. The paper also provides support for earlier results on the influence of macroeconomic conditions and the choice of exchange rate regime on volatility.
    Keywords: Structural adjustment , Exchange rates , Foreign exchange ,
    Date: 2004–08–24
  60. By: Fernando Broner; Gaston Gelos; Carmen Reinhart
    Abstract: One plausible mechanism through which financial market shocks may propagate across countries is through the effect of past gains and losses on investors' risk aversion. We first present a simple model on how heterogeneous changes in investors' risk aversion affect portfolio decisions and stock prices. Second, we empirically show that, when funds' returns are below average, they adjust their holdings toward the average (or benchmark) portfolio. In other words, they tend to sell the assets of countries in which they were "overweight," increasing their exposure to countries in which they were "underweight." Based on this insight, we construct a matrix of financial interdependence reflecting the extent to which countries share overexposed funds. This index can improve predictions about which countries are likely to be affected by contagion from crisis centers.
    Keywords: Financial crisis , Emerging markets , Stock markets , Forecasting models ,
    Date: 2004–08–09
  61. By: Roberto Pereira Guimarães; Cem Karacadag
    Abstract: This paper analyzes the effects of intervention on the level and volatility of the exchange rate in Mexico and Turkey, two emerging countries that have floating exchange rate regimes. The paper finds mixed evidence on the effectiveness of intervention. In Mexico, foreign exchange sales have a small impact on the exchange rate level and raise short-term volatility, while in Turkey, intervention does not appear to affect the exchange rate level but reduces its shortterm volatility. In both cases, the findings are consistent with officially stated policy objectives, which aim to minimize the effect of intervention on the exchange rate, but cast doubt on claims that intervention is a useful tool for smoothing volatility. Although these findings cannot be generalized to other emerging markets, intervention's apparently limited effectiveness highlights the need for central banks to use their scarce foreign reserves selectively and parsimoniously.
    Keywords: Intervention , Mexico , Turkey , Emerging markets , Exchange market developments , Foreign exchange reserves , Floating exchange rates , Capital flows , Economic models ,
    Date: 2004–07–29
  62. By: michael george (the george group)
    Abstract: This paper develops a set of management and production criteria needed to be used in order to maximize profits and shareholder values. If these criteria are achieved, the firm may achieve and sustain “supernormal” profits and revenue growth. The criteria developed here are all related to the stream of information value from the market, and the velocity of the resulting flow of information through the marketing, development, production and distribution processes. These streams are constructed in terms of their “information velocity” which provides a new way to derive the set of variables that effect (and maximize) the shareholder value. Rather than equating demand and supply at each point in time, the decision criteria is based on the Information Theoretic rate of market observations, and comparing it to the thermodynamic-analogue rate at which the firm reduces its costs per product manufactured, and the rate at which the products and services it offers respond to market changes. In addition, the paper derives the requisite valuation procedures for product and offering creation and destruction. To fulfill their role in maximizing shareholder value, management’s decision rule is based on analyzing the possible reduction of the internal entropy and increase of external entropy of each potential investment and process at a certain time interval. The rule of maximizing Information Velocity leads to the most cost-effective investment in time and money and market responsiveness. With the above derivation, it is shown that the shareholder value of all business processes are driven by the rate at which the information is generated by the market is matched by the responsive acceleration of information within the business processes. Empirical examples are provided which confirm that superior Information Velocity in all processes achieves and sustains supernormal returns.
    Keywords: Supernormal returns, Information speed, Information acceleration, entropy,maximum entropy, non value add cost,market entropy, economic profit entropy
    JEL: D1 D2 D3 D4
    Date: 2005–10–18
  63. By: Alexandros Kontonikas and Alberto Montagnoli
    Abstract: This paper analyses the relationship between monetary policy and asset prices in the context of optimal policy rules. The transmission mechanism is represented by a linearized rational expectations model augmented for the effect of asset prices on aggregate demand. Stabilization objectives are represented by a discounted quadratic loss function penalizing inflation and output gap volatility. Asset prices are allowed to deviate from their intrinsic value since they may be positively affected by past price changes. We find that in the presence of wealth effects and inefficient markets, asset price misalignments from their fundamentals should be included in the optimal interest rate reaction function.
    JEL: E52 E60 G1
  64. By: Edda Zoli
    Abstract: This paper tests empirically the theoretical prediction that the country premium paid by emerging economies on sovereign debt increases with the amount of debt up to a certain critical level, above which the supply of foreign funds becomes fixed. The results confirm this theoretical prediction. The approach developed in the paper is also used to test for the presence of moral hazard in international lending. The results indicate significant changes in the supply of funds curve consistent with the presence of moral hazard in the period immediately following the Mexican rescue operation, but not after the Russian non-bailout.
    Keywords: Credit ceilings , International capital markets , Public debt , External debt , External borrowing , Risk premium , Interest costs , Supply elasticity , Emerging markets , Financial crisis , Economic models , Access to capital markets ,
    Date: 2004–05–12
  65. By: Jose Giancarlo Gasha; Armando Méndez Morales
    Abstract: Using data from Argentina, Australia, Colombia, El Salvador, Peru, and the United States, we identify three types of threshold effects when assessing the impact of economic activity on nonperforming loans (NPLs). For advanced financial systems showing low NPLs, there is an embedded self-correcting adjustment when NPLs exceed a minimum threshold. For financial systems in emerging markets in Latin America showing higher NPLs, there is instead a magnifying effect once NPLs cross a (higher) threshold. GDP growth apparently affects NPLs only below a certain threshold, which is consistent with observed lower elasticity of credit risk to changes in economic activity in boom periods.
    Keywords: Business cycles , Exchange risk , Credit , Risk premium ,
    Date: 2004–08–24
  66. By: Joao Leitao (Universidade da Beira Interior); Cristovao Oliveira (Universida da Beira Interior)
    Abstract: In the context of interdependence of the financial markets, it becomes interesting to analyze the implications associated with the Terrorist Attacks of the 11th of September of 2001, in the USA, in terms of the development of contagion mechanisms between the main international stock exchanges. The sample is subdivided in two periods, in order to capture two different conjectures, that is, the pre-attack period, and the one that is concerned with the post-attack period. The results obtained through the estimation of a vector autoregressive model, incorporating an error correction mechanism, are presented. These results provide the detection of cointegrating relations among the economic variables, in study. A dynamic analysis is done, using exogeneity block tests, in order to check the existence of causality relations, which are defined in a Grangerian sense. For a forecasting purpose, the techniques of the variance decomposition of Cholesky, and of the impulse response functions are used. The occurrence of contagion is ratified by the results, starting from the terrorist attacks in the USA, which yielded a bigger volatility, with positive sign, in the Portuguese, and in the English Stock Exchanges.
    Keywords: Contagion, Stock Exchange, Vector Autoregressive Model.
    JEL: C30 C32 G10 G15
    Date: 2005–10–14
  67. By: Jens Nystedt
    Abstract: Recent regulatory initiatives in the United States have again raised the issue of a ''level regulatory and supervisory playing field'' and the degree of competition globally between over-the-counter (OTC) derivatives and organized derivative exchange (ODE) markets. This paper models some important aspects of how an ODE market interrelates with the OTC markets. It analyzes various ways in which an ODE market can respond to competition from the OTC markets and considers whether ODE markets would actually benefit from a more level playing field. Among other factors, such as different transaction costs, different abilities to mitigate credit risk play a significant role in determining the degree of competition between the two types of markets. This implies that a potentially important service ODE markets can provide OTC market participants is to extend clearing services to them. Such services would allow the OTC markets to focus more on providing less competitive contracts/innovations and instead customize its contracts to specific investors' risk preferences and needs.
    Keywords: Securities markets , United States , Securities regulations , Exchange markets , Competition , Economic models ,
    Date: 2004–04–22
  68. By: Tanya Araujo; Francisco Louçã
    Abstract: This paper investigates the dynamics of stocks in the S&P500 index for the last 30 years. Using a stochastic geometry technique, we investigate the evolution of the market space and define a new measure for that purpose, which is a robust index of the dynamics of the market structure and provides information on the intensity and the sectoral impact of the crises. With this measure, we analyze the effects of some extreme phenomena on the geometry of the market. Nine crashes between 1987 and 2001 are compared by looking at the way they modify the shape of the manifold that describes the S&P500 market space. These crises are identified as (a) structural, (b) general and (c) local.
    Keywords: financial markets; stochastic geometry; complexity; market spaces; market structures.
    JEL: C0 G1
  69. By: Törbjörn I. Becker; Amadou N. R. Sy
    Abstract: Bid-ask spreads for Asian emerging market currencies increased sharply during the Asian crisis. A key question is whether such wide spreads were excessive or explained by models of bid-ask spreads. Precrisis estimates of standard models show that spreads during the crisis were in most cases tighter than spreads predicted by the models and there are few cases of excessive spreads. The result is largely explained by the substantial increase in exchange rate volatility during the crisis and to some extent by the level change. The empirical models have greater explanatory power for emerging- than for mature-market currencies.
    Keywords: Exchange markets , Asia , Financial crisis , Emerging markets , Currencies ,
    Date: 2005–03–01
  70. By: Eva Gutierrez
    Abstract: This paper proposes a framework for the surveillance of financial institutions' derivatives activities. The designed framework builds on information likely to be collected by financial market regulators for supervisory purposes, and/or information collected by market participants for the purpose of their own risk management. The framework involves four pillars: (i) analyzing quantitative information on Derivatives activities, (ii) determining the adequacy of prudential regulations and supervisory arrangements, (iii) assessing the risk mitigation infrastructure, and (iv) assessing the degree of market transparency of the derivatives activities of financial institutions.
    Keywords: Financial stability , Financial crisis , Enhanced Surveillance ,
    Date: 2005–03–28
  71. By: Irina Tytell; Shang-Jin Wei
    Abstract: Monetary and fiscal policies around the world are in better shape today than two decades ago. This paper studies whether financial globalization has helped induce governments to pursue better macroeconomic policies (the "discipline effect"). The empirical tests have two innovations. First, we recognize potential endogeneity of the observed capital flows in a given country and employ an instrumental variable approach that relies on the autonomous (global) component of the capital flows. Second, we recognize inherent discreteness in defining good versus bad macroeconomic policies and use a transition matrix technique to determine whether capital flows are effective in inducing substantial qualitative policy shifts. Our results suggest that, in spite of the plausibility of the "discipline effect" in theory, it is not easy to find strong and robust causal evidence. There is some evidence that financial globalization may have induced countries to pursue low-inflation monetary policies. However, there is no evidence that it has encouraged low budget deficits.
    Keywords: Globalization , Financial sector , Inflation targeting , Capital flows ,
    Date: 2004–06–08
  72. By: Oana M. Nedelescu; R. B. Johnston
    Abstract: The terrorist attacks that have occurred in the past few years around the world have raised international awareness of the danger of terrorism and its complex repercussions on the financial markets. This paper explores the ways in which financial markets reacted to the attacks and the authorities' responses. Well-functioning financial markets, bolstered by the prompt and effective reaction of the relevant authorities, were generally efficient in absorbing shocks stemming from terrorist attacks. The paper discusses market and regulatory responses to the terrorist attacks and the elements that should be strengthened so as to further enhance the resilience of financial markets to terrorism.
    Keywords: Anti-money laundering , Combating the financing of terrorism , Capital markets ,
    Date: 2005–03–28
  73. By: Ariel Burstein; Martin Eichenbaum; Sergio Rebelo
    Abstract: Changes in the price of nontradable goods relative to tradable goods account for roughly 50 percent of the cyclical movements in real exchange rates.
    JEL: F31
    Date: 2005–10
  74. By: Anita Tuladhar
    Abstract: This paper surveys decision-making roles of governing bodies of central banks that have formally adopted inflation targeting as a monetary framework. Governance practices seek to balance institutional independence needed for monetary policy credibility with accountability required to protect democratic values. Central bank laws usually have price stability as the primary monetary policy objective but seldom require an explicit numerical inflation target. Governments are frequently involved in setting targets, but to ensure operational autonomy, legal provisions explicitly limit government influence in internal policy decision-making processes. Internal governance practices differ considerably with regard to the roles and inter-relationships between the policy, supervisory, and management boards of a central bank.
    Keywords: Inflation targeting , Governance , Central bank role , Price stabilization , Monetary policy ,
    Date: 2005–09–28
  75. By: Norbert Funke; Faisal Ahmed; Rabah Arezki
    Abstract: Over the past decade, South Africa has attracted relatively little foreign direct investment (FDI), but considerable amounts of portfolio inflows. In this context, the objective of the paper is twofold: to identify the determinants of the level and composition of capital flows to emerging markets and to draw policy conclusions for South Africa. We estimate a dynamic panel for up to 81 emerging markets using GMM (Generalized Method of Moments) techniques. The results suggest that further trade and capital control liberalization would increase the share of FDI. Additionally, a reduction in exchange rate volatility would affect the composition of capital flows in favor of FDI.
    Keywords: Capital flows , South Africa , Exchange rates , Foreign investment ,
    Date: 2005–03–11
  76. By: Alfred A. Haug (Department of Economics, York University); Syed A. Basher (Department of Economics, York University)
    Abstract: We test long¨Crun PPP within a general model of cointegration of linear and nonlinear form. Nonlinear cointegration is tested with rank tests proposed by Breitung (2001). We start with determining the order of integration of each variable in the model, applying relatively powerful DF¨CGLS tests of Elliott, Rothenberg and Stock (1996). Using monthly data from the post¨CBretton Woods era for G¨C10 countries, the evidence leads to a rejection of PPP for almost all countries. In several cases the price variables are driven by permanent shocks that differ from the ones that drive the exchange rate. Also, nonlinear cointegration cannot solve the PPP puzzle.
    Keywords: Purchasing power parity; unit roots; nonlinear cointegration
    JEL: C22 F40
    Date: 2003–01
  77. By: Robert P. Flood; Andrew K. Rose
    Abstract: This paper develops a simple methodology to test for asset integration, and applies it within and between American stock markets. Our technique relies on estimating and comparing expected risk-free rates across assets. Expected risk-free rates are allowed to vary freely over time, constrained only by the fact that they must be equal across (risk-adjusted) assets in well integrated markets. Assets are allowed to have standard risk characteristics, and are constrained by a factor model of covariances over short time periods. We find that implied expected risk-free rates vary dramatically over time, unlike short interest rates. Further, internal integration in the S&P 500 market is never rejected and is generally not rejected in the NASDAQ. Integration between the NASDAQ and the S&P, however, is always rejected dramatically.
    Keywords: Financial assets , United States , Stock markets , Risk premium , Asset prices , Economic models ,
    Date: 2004–07–20
  78. By: Jay Surti
    Abstract: This paper develops a theory of the onset of financial crises by solving for the optimal trading strategies of speculators in financial markets, in a model where each speculator tries to coordinate her trades with the market's by observing the decisions of other speculators, while simultaneously trying to preempt the market. The interaction and resolution of these two conflicting incentives are analyzed under alternate central bank policy regimes. Our model explains how imperfect information structures prevent traders from exploiting profitable opportunities and suggests how large traders help alleviate this problem by undertaking risky arbitrage early in the investment process, in return for higher profits, if successful. The central bank's defense strategy is a parameter of this model. We compare the likelihood of a crisis under alternate defense strategies and show that credible monetary authorities can provide a better defense of exchange rate regimes against adverse shocks by not disclosing their commitment value to the market.
    Keywords: Central bank policy , Financial crisis , Trade , Markets , Economic models ,
    Date: 2004–02–27
  79. By: Sujit Chakravorti; Subir Lall
    Abstract: This paper proposes a framework for comovements of asset prices with seemingly unrelated fundamentals, as an outcome of optimal portfolio strategies by fund managers. In emerging markets, dedicated managers outperforming a benchmark index and global managers maximizing absolute returns lead to systematic interactions between asset prices, without asymmetric information. The model determines optimal portfolio weights, the incidence of relative value strategies, and the systematic deviation of prices from fundamentals with limits to arbitraging this differential. Managerial compensation contracts, optimal at the firm level, may lead to inefficiencies at the macroeconomic level. Conditions are identified when shocks in one emerging market affect others.
    Keywords: Globalization , Financial crisis , Economic models ,
    Date: 2004–11–01
  80. By: Enrica Detragiache; Asli Demirgüç-Kunt
    Abstract: A rapidly growing empirical literature is studying the causes and consequences of bank fragility in present-day economies. The paper reviews the two basic methodologies adopted in cross-country empirical studies-the signals approach and the multivariate probability model-and their application to studying the determinants of banking crises. The use of these models to provide early warnings for crises is also reviewed, as are studies of the economic effects of banking crises and of the policies to forestall them. The paper concludes by identifying directions for future research.
    Keywords: Financial crisis , Banking , Insolvency , Bank resolution , Economic models ,
    Date: 2005–05–24
  81. By: Nikolay Gueorguiev; Pelin Berkmen
    Abstract: In the near future, Romania will introduce inflation targeting and fully liberalize its capital account. This paper aims to analyze, in a dynamic general-equilibrium model with sticky prices and monopolistic competition, how these two profound changes will affect the ability of monetary policy to pursue its objective of price stability. In particular, the resilience of the current and future monetary policy regimes to shocks is evaluated against two welfare criteria: a standard central bank loss function containing the deviations of inflation, output, and the real exchange rate from their equilibrium values, and the compensating variation measure of Lucas (1987).
    Keywords: Inflation targeting , Romania , Monetary policy , Capital account liberalization ,
    Date: 2004–12–27
  82. By: Judith A. Clarke (Department of Economics, University of Victoria); Marsha J. Courchane (ERS Group, Washington D.C.); Nilanjana Roy (Department of Economics, University of Victoria)
    Abstract: The binary logistic regression or logit link model is commonly used to test for racial disparate treatment in fairlending studies undertaken by government agencies, including the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB). Ensuring race neutrality in lending remains a concern of regulators and consumer advocates. Improving the understanding of any shortcomings of either bank internal models or regulatory agency models will enable those participants in the mortgage industry to better serve the needs of consumers. We explore this issue using five bank studies undertaken by the OCC. We consider the impact of the logit link assumption, as this determines how race affects the likelihood of loan approval, by moving to three other links: probit, gompit and complementary log log; the latter two are examples of asymmetric links. As our data sets have been obtained using stratified sampling procedures, which has been typical at the OCC, rather than being drawn via simple random sampling, moving away from the logit link complicates estimation; it is no longer possible to use a standard estimation command with an adjustment for stratum effects. Our results reveal that the choice of link function, despite exhibiting similar sample fit, can influence findings of disparate treatment at the nominal level of significance commonly accepted as the legal standard. We also find that the use of a resampling method, which aims to better approximate the finite sample null distribution, for obtaining p-values typically leads to support for discrimination more often than arises from use of the standard normal approximation.
    Keywords: Logit, Fair lending, Stratified sampling, Binary response, Semi-parametric maximum likelihood, Pseudo log-likelihood, Profile log-likelihood, Without replacement resampling, Bootstrapping
    Date: 2005–10–14
  83. By: Richard Podpiera; Tomas Dvorak
    Abstract: The announcement of the European Union enlargement coincided with a dramatic rise in stock prices in accession countries. This paper investigates the hypothesis that the rise in stock prices was a result of the repricing of systematic risk due to the integration of accession countries into the world market. We found that firm-level stock price changes are positively related to the difference between a firm's local and world market betas. This result is robust to controlling for changes in expected earnings, country effects, and other controls, although the magnitude of the effect is not very large. The differences between local and world betas explain nearly 22 percent of the stock price increase.
    Keywords: International financial system , European Union , Asset prices , International capital markets , Stock markets ,
    Date: 2005–09–25
  84. By: Demid Golikov
    Abstract: This is a short literature overview. (1) The literature demonstrates no coherent view on the nature of economic exchange and, in particular, provides no conventionally accepted, fully satisfactory explanation of the real effects of money. Recent developments in macroeconomics suggest a role for financial intermediaries. (2) The economics literature, however, has very little to say about that though the role of intermediaries in economic history has always been emphasised. (3) Further reading suggests that intermediation is largely missing from economics for methodological reasons. Revival of interest in this topic became evident in recent years thanks to developments in the treatment of asymmetric information, thin markets, and dynamics with innovations. (4) Today's literature, however, still primarily addresses empirical and specific issues like particular functions of intermediaries. Analysis of intermediation in the context of general equilibrium, explanation of its role in the monetary transmission and non-neutrality have not been seriously undertaken. Only a few authors so far have put forward their proposals for this perspective.
    Keywords: monetary theory, financial intermediary, asymmetric information, microfoundations
    JEL: B41 E4 E51 G21
    Date: 2005–10–20
  85. By: Adolfo Barajas; Ralph Chami; Thomas F. Cosimano
    Abstract: Drawing from a unique data set comprising 2,893 banks and 152 countries over the period 1987 to 2000, we test whether the adoption of the Basel Accord by Latin American and Caribbean countries was responsible for the serious slowdowns in credit growth experienced by these countries. We find that, on average, both bank capitalization and lending activities in Latin America increased after Basel. Consequently, Basel did not seem to lead to an overall credit decline. However, we do find evidence that loan growth became more sensitive to some risk factors. Our study suggests that the upcoming adoption of Basel II might cause greater procyclicality of credit.
    Keywords: Bank supervision , Latin America , Capital markets , Basel Core Principles , Credit ,
    Date: 2005–03–04
  86. By: Kenneth Sullivan
    Abstract: The IMF's development of the Code of Good Practices on Transparency in Monetary and Financial Policies and the introduction of safeguards assessments have increased emphasis on transparency of the disclosures made in central bank financial statements. This paper, which updates WP/00/186, looks at the disclosure requirements for central banks under International Financial Reporting Standards and provides practical guidance for those responsible for preparing central bank financial statements.
    Keywords: Central banks , Transparency , Bank accounting ,
    Date: 2005–04–29
  87. By: Martin D. D. Evans (Georgetown University) and Richard K. Lyons (U.C. Berkeley and NBER) (Department of Economics, Georgetown University)
    Abstract: This paper develops a model for understanding end-user order flow in the FX market. The model addresses several puzzling findings. First, the estimated price-impact of flow from different end-user segments is, dollar-for-dollar, quite different. Second, order flow from segments traditionally thought to be liquidity-motivated actually has power to forecast exchange rates. Third, about one third of order flow's power to forecast exchange rates one month ahead comes from flow's ability to forecast future flow, whereas the re-maining two-thirds applies to price components unrelated to future flow. We show that all of these features arise naturally from end-user heterogeneity, in a setting where order flow provides timely information to market-makers about the state of the macroeconomy. Classification-JEL Codes: F3, F4, G1
    Keywords: Exchange rates, forecasting, microstructure, order flow
  88. By: David Hauner
    Abstract: Cost-efficiency, scale efficiency, and productivity change are estimated by data envelopment analysis; and cost-efficiency is regressed on explanatory variables. No evidence is found for average productivity responding to deregulation over the period studied. State-owned banks are found to be more cost-efficient (likely owing to cheaper funds) and cooperative banks to be about as cost-efficient as private banks. Increasing economies of scale but decreasing economies of scope provide rationale for M&As among banks with similar product portfolios. Interbank and capital market funding is found to be more cost-efficient than deposits when the cost of retail networks is controlled for.
    Keywords: Banks , Germany , Austria , Productivity , Economic models ,
    Date: 2004–08–13
  89. By: Eva H. G. Hüpkes; Marc Quintyn; Michael Taylor
    Abstract: Policymakers' uneasiness about granting independence to financial sector regulators stems to a large extent from the lack of familiarity with, and elusiveness of, the concept of accountability. This paper gives operational content to accountability and argues that it is possible to do so in a way that encourages and supports agency independence. The paper first elaborates on the role and purposes of accountability. Second, it shows that the unique features of financial sector supervision point to a more complex system of accountability arrangements than, for instance, the conduct of monetary policy. Finally, the paper discusses specific arrangements that can best secure the objectives of accountability and, thus, independence. Our findings have a wider application than financial sector supervision.
    Keywords: Financial sector , Financial stability , Central banks , Bank Supervision ,
    Date: 2005–03–21
  90. By: Benoît Mercereau; Jacques Miniane
    Abstract: Under near-singularity conditions typically generated by persistence in current account data the predictions of present value models become extremely sensitive to small sample estimation error. Moreover, traditional Wald tests will distort the likelihood that the model is true. Using OECD data we find that: (i) the Wald test often leads to the wrong inference compared to a valid test; (ii) in all cases posterior distributions of the predicted series and associated correlation coefficients and variance ratios are very wide. In particular, one cannot draw any firm conclusion regarding excess current account volatility.
    Keywords: Current account , Economic models ,
    Date: 2004–07–12
  91. By: Alain Ize; Eduardo Levy Yeyati
    Abstract: De facto (unofficial) dollarization, defined as the holding by residents of assets and liabilities denominated in a foreign currency, is a policy concern in an increasing number of developing economies. This paper addresses the dollarization debate from this perspective, with the goal of setting the stage for a more detailed and focused discussion of whether de-dollarization should be a policy objective and, if so, how best to pursue this objective. We review existing theories of de facto dollarization and the extent to which they are supported by the available evidence, presents the main strategies for reform, and proposes a list of policy recommendations.
    Keywords: Dollarization , Monetary policy ,
    Date: 2005–09–30
  92. By: Alain Ize
    Abstract: This paper provides a simple, quantitative, net worth-based, approach to assessing the need for central bank capital. It derives a concept of "core capital" (a function of the central bank's operating expenditures and the carrying cost of its international reserves) as the minimum capital needed by a central bank to ensure the credibility of its inflation target. The approach is illustrated with the published accounts of three loss-making central banks and selected accounting entries for a broader sample of central banks. Policy implications are explored. In particular, the paper argues that central bank capitalizations cannot be automatic and require instead a broad policy debate.
    Keywords: Central banks , Costa Rica , Chile , Mozambique , Capital , Reserves ,
    Date: 2005–02–02
  93. By: Ketil Hviding; M. Nowak; Luca Antonio Ricci
    Abstract: This paper studies the role of an increase in foreign exchange reserves in reducing currency volatility for emerging market countries. The study employs a panel of 28 countries over the period 1986-2002. Several control variables are introduced in the regressions to account for other factors affecting exchange rate volatility (monetary and external indicators as well as conventional macroeconomic fundamentals). The paper controls for the endogeneity induced by the role of the exchange rate regime, since the regime can affect both the level of reserves and exchange rate volatility. The results provide ample support for the proposition that holding adequate reserves reduces exchange rate volatility. The effect is strong and robust; moreover, it is nonlinear and appears to operate through a signaling effect.
    Keywords: Exchange rate variability , Reserves , Reserves adequacy ,
    Date: 2004–10–14
  94. By: Guillermo R. LeFort-Varela
    Abstract: After the failure of the early 1980s, a second attempt at capital account liberalization was gradually carried out in Chile during the 1990s, this time in parallel with increased exchange rate flexibility. Capital account regulations were applied to support the independent monetary policy committed to the inflation target, while the exchange rate was quasi-pegged within a band that targeted the real exchange rate (RER). Still, the policy framework directed at stabilizing the RER appears to have been of limited effectiveness, with the surges and sudden-stops in capital flows playing an important role in RER dynamics. Foreign exchange market intervention appears not to have affected the RER while reserve requirement appears to have exerted a depreciating effect. Government spending and import tariffs, appear to be significant tools to moderate the real appreciation thus providing one additional reason for adopting a countercyclical fiscal policy and accelerating trade openness
    Keywords: Capital account liberalization , Chile , Real effective exchange rates , Foreign exchange , Intervention , Reserve requirements , Capital flows ,
    Date: 2005–07–15
  95. By: Kevin Greenidge; Karen Chase; Winston Moore; DeLisle Worrell
    Abstract: A banking system module is incorporated into the Central Bank of Barbados's multisectoral macroeconomic forecasting model, and a medium-term forecast is generated for bank capitalization, profitability, liquidity and nonperforming loans. Stress tests are performed for the first year of the forecast, to test the banking system's resilience to real sector shocks. The analysis, which would in practice be only part of the vulnerability assessment, indicates that the banking system is stable and resilient to macroeconomic shocks of a type and magnitude that Barbados has experienced in the past.
    Keywords: Financial stability , Barbados , Forecasting models ,
    Date: 2005–04–22
  96. By: Juan Sole
    Abstract: This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictions where this policy can be effective. The friction I emphasize is the same as in Lucas (1990): money is required for asset transactions. When the government raises domestic interest rates, agents want to increase their holdings of domestic currency in order to acquire more domestic-currency-denominated assets. Thus, agents do not run on the reserves of the central bank, and the peg survives. A key implication of the model is that an interest rate defense can always be successful, but at great costs for domestic agents. Hence the reluctance of governments to sustain this policy for long periods of time.
    Keywords: Interest rates , Currency pegs , Exchange rate regimes ,
    Date: 2004–06–08
  97. By: Ashoka Mody; Barry J. Eichengreen; Kenneth Kletzer
    Abstract: The IMF attempts to catalyze and stabilize private capital flows to emerging markets by providing public monitoring and emergency finance. In analyzing its role we contrast cases where banks and bondholders do the lending. Banks have a natural advantage in monitoring and creditor coordination, while bonds have superior risk sharing characteristics. Consistent with this assumption, banks reduce spreads as they obtain more information through repeat transactions with borrowers. By comparison, repeat borrowing has little influence in bond markets, where publicly available information dominates. But spreads on bonds are lower when they are issued in conjunction with IMF-supported programs, as if the existence of a program conveyed positive information to bondholders. The influence of IMF monitoring in bond markets is especially pronounced for countries vulnerable to liquidity crises.
    Keywords: Private sector , Access to capital markets , Fund-supported adjustment programs , Bonds ,
    Date: 2005–05–10
  98. By: Taline Koranchelian
    Abstract: Drawing on the existing literature, I estimate a long-run equilibrium real exchange rate path for Algeria. I find that the Balassa-Samuelson effect together with real oil prices explain the long-run evolution of the equilibrium real exchange rate in Algeria. The half-life of the deviation of the real exchange rate from the estimated equilibrium level is about nine months, similar to that in other commodity-exporting countries. The general conclusions are that: (i) there is a time-varying long-run equilibrium exchange rate in Algeria as in other commodity-exporting countries; and (ii) the real effective exchange rate of the Algerian dinar at end-2003 was broadly in line with this equilibrium.
    Keywords: Exchange rates , Algeria , Commodities , Exports ,
    Date: 2005–07–20
  99. By: Miguel A. Kiguel; Alain Ize; Eduardo Levy Yeyati
    Abstract: This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of "circuit breakers." The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks' liquidity.
    Keywords: Dollarization , Liquidity , Financial crisis , Bank soundness , Banking systems ,
    Date: 2005–09–30
  100. By: Theodore Panagiotidis (Dept of Economics Univ. of Loughborough); Afrodit Triampella
    Abstract: This paper investigates the argument for Central Bank Independence (CBI) in the case of Greece. Using a time series approach and the last data available before Greece joined the EMU, the hypothesis that central bank independence is important for controlling inflation is examined. Employing two indices, which serve as proxies for CBI, LegalCBI and TOR, the inverse relationship between CBI and inflation was confirmed. The interactions between the variability of inflation and CBI were also investigated. Furthermore, evidence was found to suggest that the rate of turnover Granger causes inflation.
    Keywords: Central Bank Independence, Inflation, Greece.
    JEL: E58 E52
    Date: 2005–07
  101. By: Benoît Mercereau
    Abstract: This paper develops a simple model to study the impact of stock markets on the current account. A closed-form solution for the current account is derived from the optimal portfolio and consumption/saving choices of a representative agent. Formally, the model can be seen as a stock market-augmented version of the "fundamental equation of the current account" popularized by Jeffrey Sachs. It appears to shed light on recent developments in the U.S. current account deficit. The model also shows how the current account may help predict future stock market performance and/or endowment streams.
    Keywords: Current account , United States , Stock markets , Economic models ,
    Date: 2004–04–05
  102. By: Michael T. Gapen; Yingbin Xiao; Cheng Hoom Lim; Dale F. Gray
    Abstract: In this paper, we examine the ability of the contingent claims approach (CCA) to identify corporate sector and economy-wide vulnerabilities. We apply the Moody's MfRisk model, which uses aggregated CCA principles, to assess vulnerabilities retroactively in two historical country cases. The results indicate that the method may prove helpful in identifying corporate sector vulnerabilities and estimating the associated value of risk transfer across interrelated balance sheets of the corporate, financial, and public sectors.
    Keywords: Credit , Brazil , Thailand , Risk premium , Financial sector , Public sector , Economic models ,
    Date: 2004–07–27
  103. By: James M. Boughton
    Abstract: All financial institutions specialize, in dimensions that may include categories of assets and liabilities, types of services offered, customer demographics, and geographic coverage. The International Monetary Fund is the only international financial institution that is universal in its geographic scope, prepared to lend on request to virtually any country in the world. Why has this status come about? What are its costs and benefits? Is it an appropriate model for a world where macroeconomic imbalances, financial crises, and disparities in economic development must compete for attention and resources?
    Date: 2005–06–22
  104. By: Rafael Romeu; Lawrence Ausubel
    Abstract: This paper studies the participation and performance of sophisticated versus unsophisticated auction participants in an environment with numerous bidders, uncertainty, and asymmetric information. We examine multi-unit, pay-as-bid, currency auctions conducted by the Central Bank of Venezuela. We find that sophisticated bidders outperform their less sophisticated rivals during periods of high volatility, apparently as a result of their superior informationgathering ability. The result is consistent across both quantity (sophisticated bidders win more market share) and price (sophisticated bidders pay lower premiums). The result is consistent with the view that a pay-as-bid auction format may be detrimental to participation by less-informed bidders.
    Date: 2005–08–19
  105. By: Inci Ötker; Paul Hilbers; Gudrun Johnsen; Ceyla Pazarbasioglu
    Abstract: This paper reviews trends in bank lending to the private sector, with a particular focus on Central and Eastern European countries, and finds that rapid growth of private sector credit continues to be a key challenge for most of these countries. The paper discusses possible implications for economic and financial stability and the policy options available to counter and reduce these risks. It argues that the authorities will need to focus on the implications for both the macro economy and the financial system and, depending on their assessment, may need a comprehensive policy response comprising a mix of macro and prudential policies. In particular where there are limitations to the effective use of monetary and fiscal measures, supervisory and prudential policy responses will have a key role in addressing financial stability concerns.
    Keywords: Credit expansion , Europe , Financial stability , Economic policy ,
    Date: 2005–08–10
  106. By: Andrei Semenov (Department of Economics, York University)
    Abstract: This paper develops an approximate equilibrium factor model for asset returns. In this model, the pricing factors are the cross-moments of return with the cross-sectional moments of individual consumption and the signs of the risk factor coefficients are driven by preference assumptions. Using household-level quarterly consumption data from the U.S. Consumer Expenditure Survey, we find that this model explains the observed equity premium with an economically realistic value of risk aversion when the stochastic discount factor is expressed in terms of the cross-sectional skewness and kurtosis, in addition to the mean and variance, of individual consumption.
    Keywords: asset pricing, equity premium, Euler equation, heterogeneous consumers, incomplete consumption insurance.
    JEL: G12
    Date: 2003–12
  107. By: Andrew Powell; Alain Ize
    Abstract: We develop a theoretical framework that encompasses four distinct motives for dollarization and discuss appropriate policy responses to help contain dollarization and its attendant risks. "Moral hazard" dollarization provides a clear case for prudential policy activism. However, prudential reform will have only a limited impact on dollarization when the main culprits are fear of floating and lack of monetary credibility. In such cases, a concerted and comprehensive reform agenda, including market-oriented and institutional reforms, would be needed to shift the balance of risks in favor of the domestic currency. While quantitative limits on dollarization could also be used to speed up de-dollarization, risks could be high.
    Keywords: Dollarization , Monetary policy , Financial crisis , Financial systems , Currencies , Exchange risk , Economic models ,
    Date: 2004–05–11
  108. By: Kee-Hong Bae; Rene M. Stulz; Hongping Tan
    Abstract: This paper examines whether analysts resident in a country make more precise earnings forecasts for firms in that country than analysts who are not resident in that country. Using a sample of 32 countries, we find that there is an economically and statistically significant analyst local advantage even after controlling for firm and analyst characteristics. The importance of the local advantage is inversely related to the quality of the information provided by firms. In particular, the local advantage is high in countries where earnings are smoothed more, less information is disclosed by firms, and firm idiosyncratic information explains a smaller fraction of stock returns. The local advantage is also negatively related to market participation by foreign investors and by institutions and positively related to holdings by insiders. U.S. investors underweight a country's stocks more in their portfolios if that country has a higher analyst local advantage.
    JEL: F30 G11 G14 G24
    Date: 2005–10
  109. By: Thomson Fontaine
    Abstract: This paper takes a step in empirically testing the implications of a number of theoretical models that attempt to highlight the dynamics behind currency crises. By focusing on countries with broadly disparate economic and political arrangements, the study attempts to determine the extent to which these variables matter in affecting the probabilities of currency crises occurring. The empirical findings provide support for the view that, in general, a deterioration in economic fundamentals and the pursuit of lax monetary policy can contribute to currency crises. The experiences of several emerging market economies suggests that the sustainability of exchange rate policy depends both on adequate policy responses to the shocks to the economy and on the fragility of the economic, financial, and political system.
    Keywords: Currencies , Developed countries , Emerging markets , Financial crisis , Exchange rates ,
    Date: 2005–02–02
  110. By: Michael Kumhof; Evan Tanner
    Abstract: The literature on optimal fiscal policy finds that highly volatile real returns on government debt, for example through surprise inflation, have very low costs. However, policymakers are almost always very apprehensive of this option. The paper discusses evidence concerning features of developing country financial markets that are missing in existing models, and that may suggest why this policy is considered so costly in practice. Most importantly, domestic banks choose to be highly exposed to government debt because the alternative, private lending, is more risky under existing legal and institutional imperfections. This exposure makes banks and their borrowers vulnerable to the government's debt policy.
    Keywords: Fiscal policy , Taxation , Inflation , Public debt ,
    Date: 2005–03–24
  111. By: Emilia Magdalena Jurzyk; Bernhard Fritz-Krockow
    Abstract: This paper examines the relationship between fixed exchange rate arrangements and trade using a gravity model of international trade together with bilateral trade data from 24 countries from the Caribbean and Latin America for the period 1960-2001. The analysis indicates that a credible fixed peg has a positive impact on the value of bilateral trade. Moreover, the positive impact on trade is more pronounced with a stricter definition of the fixed peg or a longer duration of the peg. This supports the argument that the credibility of an exchange rate peg is an important element to determine bilateral trade. There is, however, no evidence to suggest that a currency union provides additional benefits.
    Keywords: Exchange rate regimes , Latin America , Bilateral trade , Currency pegs , Economic models ,
    Date: 2004–09–14
  112. By: Sibel Yelten
    Abstract: This paper uses the Sjaastad model to estimate the optimal currency area for the Nepalese rupee and concludes that, currently, Nepal may be reasonably well off with its peg to the Indian rupee. As its economy opens and its trade base and trading partners expand, it may want to reevaluate whether moving toward an exchange rate basket including the U.S. dollar may be a better policy choice. The regression results indicate that, currently, the prices of imported goods in Nepal are solely influenced by India, suggesting that with the peg to the Indian rupee, Nepal can isolate the import side of its economy completely from external shocks. On the export side, the regression results indicate that Nepalese export prices seem, to a large extent, to be influenced by U.S. prices. However, the export price index had to be constructed, and the construction methodology is likely to entail an overestimation of the impact of the U.S. dollar.
    Keywords: Monetary unions , Nepal , Asia , Financial crisis , Exchange rates , Currencies , Currency pegs , Economic models ,
    Date: 2004–08–16
  113. By: Shujing Li; Isabel K. Yan; Hamid Faruqee
    Abstract: Despite the liberalization of foreign portfolio investment around the globe since the early 1980s, the home-bias phenomenon is still found to exist. Using a relatively new IMF survey dataset of cross-border equity holdings, this paper tests new structural equations from a consumption-based asset-pricing model on international portfolio holdings. Using of stock data allows us to provide new and clear-cut evidence on the determinants of international portfolio holdings. The empirical results show that an augmented gravity model performs remarkably well. The results indicate that market size, transaction cost, and information asymmetry are major determinants of cross-border portfolio choice. These findings shed light on alternative theories of international portfolio holdings, especially on the transaction and information cost-based explanations of home bias.
    Keywords: International capital markets , Capital flows , Capital inflows , Economic models ,
    Date: 2004–03–09
  114. By: Christopher Adam; David Cobham
    Abstract: A 'new version' gravity model is used to estimate the effect of de facto exchange rate regimes, as classified by Reinhart and Rogoff (2004), on bilateral trade. The results indicate that, while participation in a common currency union is typically strongly 'protrade' - as first suggested by Rose (2000) - other exchange rate regimes which lower the exchange rate uncertainty and transactions costs associated with international trade between countries are significantly more pro-trade than the default regime of a 'double float'. They suggest that the direct and indirect effects of exchange rate regimes on uncertainty and transactions costs tend to outweigh the trade-diverting substitution effects. In addition, there is evidence that membership of different currency unions by two countries has pro-trade effects, which can be understood in terms of a large indirect effect on transactions costs. Tariff-equivalent monetary barriers associated with each of the exchange rate regimes are also calculated.
    Keywords: Gravity models, geography, trade, exchange rate regime, currency union, transactions costs, tariff-equivalent barriers
    JEL: F10 F33 F49
    Date: 2005
  115. By: Mario Catalán; Eduardo J.J. Ganapolsky
    Abstract: There is a widespread view that bank capital requirements should be loosened during recessions and tightened during expansions to avoid excessive credit and output swings. This view is based on a partial analysis that ignores the effects of capital requirement policies on the saving decisions of households, and, through this channel, on bank loans and output. We present an intertemporal general equilibrium framework that accounts for such effects and evaluate the optimal responses to loan supply and productivity (loan demand) shocks. In contrast to the standard view, we show that, when loan supply is reduced, increasing the capital requirement allows a faster recovery of households' savings, loans, and output than a flat capital requirement policy. When productivity (loan demand) is reduced, lowering the capital requirement facilitates households' dissaving and amplifies the output decline, but enhances welfare. Finally, we show that if productivity reductions are anticipated-rather than unanticipated-by regulators, lowering the capital requirement preemptively enhances welfare through greater intertemporal smoothing of households' consumption and deposit holdings.
    Date: 2005–08–26
  116. By: Mardi Dungey; Renee Fry; Vance Martin; Brenda González-Hermosillo
    Abstract: The existing literature suggests a number of alternative methods to test for the presence of contagion during financial market crises. This paper reviews those methods and shows how they are related in a unified framework. A number of extensions are also suggested that allow for multivariate testing, endogeneity issues, and structural breaks.
    Keywords: Financial crisis , Economic models ,
    Date: 2004–05–20
  117. By: Cumhur Ekinci (CNAM Paris & Aix-Marseille III University)
    Abstract: We discuss the use of order book as a source of information and show step by step the procedure of its reconstruction for the case of Istanbul Stock Exchange. We then propose many new variables derived from the order book potentially prolific for future research. We also put forward an original approach by incorporating trades into the order book.
    Keywords: order, transaction, order book, trading, microstructure, financial markets, Istanbul Stock Exchange
    JEL: G10
    Date: 2005–10–20
  118. By: Vladimir Klyuev
    Abstract: This paper introduces a tractable capital market friction mechanism that allows a break of the parity between domestic and external interest rates and generates a gradual evolution of capital stock and other macroeconomic variables-in contrast to the instantaneous convergence found in models with interest rate parity. The friction, derived from explicit microfoundations, is such that the cost of new loans is an increasing function of net borrowing. The paper also presents a two-sector, open economy model of capital accumulation, where the friction mechanism is combined with standard assumptions about household preferences and production technology, which generates plausible dynamics of macroeconomic variables.
    Keywords: Real effective exchange rates , Capital inflows , Capital accumulation , Economic models ,
    Date: 2004–03–09
  119. By: Rodolphe Blavy; Murat  Yülek; Anupam Basu
    Abstract: Based on the experience of selected countries, this paper offers a critical presentation of the development of the microfinance sector in Africa. The paper supports the view that microfinance institutions, especially those engaged in full financial intermediation, complement effectively the banking sector in extending financial services and successfully draw on the rich experience of community-based development and preexisting informal methods of financial intermediation in Africa. Growing linkages between microfinance institutions and the banking system and the dissemination of good practices by nongovernment organizations contribute to the sound development of the sector, supported by regulation and supervision by local authorities.
    Keywords: Public finance , Africa , Bank regulations , Savings , Economic models ,
    Date: 2004–09–28
  120. By: Natalia T. Tamirisa
    Abstract: This paper examines how the macroeconomic effects of capital controls vary depending on which type of international financial transaction they cover. Drawing on Malaysia's experiences in regulating the capital account during the 1990s, it finds, in an error-correction model, that capital controls generally have statistically insignificant effects on the exchange rate. Controls on portfolio outflows and on bank and foreign exchange operations facilitate reductions in the domestic interest rate, while controls on portfolio inflows have the opposite effect, in line with the theoretical priors. Controls on international transactions in the domestic currency and stock market operations have statistically insignificant effects on the interest rate differential.
    Keywords: Capital controls , Malaysia , Capital flows , Investment ,
    Date: 2004–01–24
  121. By: Vlad Manole; David A. Grigorian
    Abstract: Bahrain's financial sector development strategy succeeded in building a leading regional banking center, which has become one of the main engines of growth and sources of employment. Although the simulations conducted in the paper suggest that the banking sector in Bahrain continues to occupy a front-runner position among those in a sample of member countries of the Gulf Cooperation Council, they also reveal that: (i) as expected, banks in Bahrain still lag behind their Singaporean counterparts, and (ii) there is strong competition from other countries in the region. The paper also finds that in terms of scale efficiency, the banks in Bahrain operate at the same level as banks in Singapore and their closest competitors in Qatar and the United Arab Emirates. The results appear to be robust with respect to changes in the sample size and model specifications.
    Keywords: Data analysis , Bahrain , Banking systems ,
    Date: 2005–06–22
  122. By: JoAnne Morris; Tonny Lybek
    Abstract: This paper identifies issues to consider when designing the structure, size, and composition of the governing boards and management of a central bank. While central bank autonomy and accountability are generally accepted as good practice, there is less consensus regarding the structure, size, and composition of the governing bodies. This paper surveys 101 central bank laws covering 113 countries and classifies the governance structure according to degree of autonomy, functions performed, size, composition, appointment procedures, and terms of the members. The paper concludes that an appropriate balance must be struck between the functions of the governing entities, simplicity, and country specific factors. The functions of the various bodies follow logically if a greater appreciation exists for the type of autonomy delegated to the central bank.
    Keywords: Central banks , Governance , Central bank role ,
    Date: 2004–12–17
  123. By: Alain Ize
    Abstract: Rapidly rising dollarization and numerous related financial crises in recent years have heightened the need for policy action. This paper contributes to the policy debate by presenting a common analytic framework that examines the roots of de facto financial dollarization under different economic environments and analyzes its interplay with monetary and prudential policies. In addition to providing a systematic analysis of the existence, stability, and multiplicity of dollarization equilibria, the paper makes a few novel contributions. In particular, it stresses the key role played by monetary policy endogeneity and identifies the underlying determinants of the peso premium that are responsible for inducing a preference for the dollar in financial transactions.
    Keywords: Dollarization , Monetary policy , Financial crisis , Credit , Risk premium , Economic models ,
    Date: 2005–09–30
  124. By: Ian Babetskii; Balazs Egert
    Abstract: This paper investigates the equilibrium exchange rate of the Czech koruna using the reduced form equation of the stock-flow approach advocated, for instance, by Faruqee (1995) and Alberola et al. (1999). We investigate whether or not the observed real exchange rate of the Czech koruna is close to its equilibrium value over the period from 1993 to 2004. Our empirical approach is tantamount to the Behavioural Equilibrium Exchange Rate (BEER) popularised by MacDonald (1997) and Clark and MacDonald (1998), in that the Czech real exchange rate vis-a-vis the euro is regressed on the dual productivity differential and the net foreign assets position, based on which actual and total misalignment figures are derived in a time series context. In other words, we check the quality of the Czech BEER. We also study the impact of a possible initial under-valuation on the estimated equilibrium exchange rate. Employing monthly time series from 1993:M1 to 2004:M9 and applying several alternative cointegration techniques, we identify a period of an over-valuation in 1997 and in 1999, an increasing over-valuation until 2002, an under-valuation in 2003 and a correction towards equilibrium in the second half of 2004.
    Date: 2005–06
  125. By: DeLisle Worrell
    Abstract: This paper suggests a strategy designed to make best use of the available quantitative techniques of financial sector assessment. It incorporates early warning systems, financial sector forecasts, stress tests for systemically important financial institutions, interbank contagion analysis, and corporate and household financial indicators. It will seldom be possible to employ every one of these techniques, but the wider the range of methodologies used, the greater may be the insight into the strengths and vulnerabilities of the financial sector. The quantitative assessment is always complemented by a qualitative assessment, including reviews of relevant standards and codes.
    Keywords: Financial soundness indicators , Financial sector , Economic models ,
    Date: 2004–08–27
  126. By: Hamid Faruqee
    Abstract: Exchange rate pass-through in a set of euro area prices along the pricing chain is examined. Using a vector autoregression (VAR) approach, the empirics analyze the joint time-series behavior of the euro exchange rate and a system of euro-area prices in response to an exchange rate shock. The impulse-response functions from the VAR estimates are used to identify-in a 'new open economy macroeconomics model'-those key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. Area-wide prices are found to display incomplete pass-through, consistent with euro currency-pricing and pricing-to-market behavior. The results are compared to those for the other major industrial economies, and suggest that, as with the United States, "expenditure-switching" effects on the current account still operate but are generally small.
    Keywords: Exchange rates , Prices , Economic models ,
    Date: 2004–02–10
  127. By: Claudio Bravo-Ortega; Julian di Giovanni
    Abstract: This paper examines the impact of trade costs on real exchange rate volatility. The channel is examined by constructing a two-country Ricardian model of trade, based on the work of Dornbusch, Fischer, and Samuelson (1977), which shows that higher trade costs result in a larger nontradable sector. This, in turn, leads to higher real exchange rate volatility. We provide empirical evidence supporting the channel.
    Keywords: Real effective exchange rates , Exchange rate variability , Trade models ,
    Date: 2005–01–13
  128. By: Emilio Sacerdoti
    Abstract: This study discusses issues of access to bank credit in Sub-Saharan Africa, and examines measures that could help facilitate access by the private sector to bank credit. It reviews in particular obstacles to credit small- and medium-scale enterprises and agriculture, and examines progress in the design and implementation of reform measures that are needed to create an institutional environment more supportive of credit activity. It also reviews bank interest rate spreads and profit margins, and their determinants, and compares such spreads with those prevailing in other regions of the world.
    Date: 2005–08–25
  129. By: Thierry Tressel; Enrica Detragiache; Poonam Gupta
    Abstract: This paper considers how a comprehensive set of factors relates to financial sector performance in low-income countries (LICs). It finds that corruption and inflation are associated with a shallower and less efficient financial system, while legal origin and characteristics of the supervisory and regulatory framework have no significant relationship with performance. Moreover, better contract enforcement and information about borrowers are associated with more private sector credit. Some results are surprising. Countries with more foreign bank penetration seem to have shallower and not necessarily more efficient financial sectors, while a larger presence of state-owned banks is correlated with more bank deposits and lower overhead costs, even after controlling for market size and concentration. Although these relationships are robust, more research is needed to ascertain the direction of causality and identify channels of transmission before deriving policy implications.
    Date: 2005–08–25
  130. By: Kina Chenard; Udaibir S. Das; Marc Quintyn
    Abstract: This paper provides empirical evidence that the quality of regulatory governance-governance practices adopted by financial system regulators and supervisors-matters for financial system soundness. The paper constructs indices of financial system soundness and regulatory governance, based on country data collected from the Financial Sector Assessment Program (FSAP). Regression results indicate that regulatory governance has a significant influence on financial system soundness, along with variables reflecting macroeconomic conditions, the structure of the banking system, and the quality of political institutions and public sector governance. The results also indicate that good public sector governance amplifies the impact of regulatory governance on financial system soundness.
    Keywords: Governance , Financial systems , Bank supervision , Transparency , Economic models ,
    Date: 2004–06–14
  131. By: Luis Ignacio Jácome; Francisco F. Vázquez
    Abstract: This paper reviews central bank legislation in 24 countries in Latin America and the Caribbean during the 1990s. Using panel regressions, we find a negative relationship between legal central bank independence (CBI) and inflation. This result holds for three alternative measures of CBI and after controlling for international inflation, banking crises, and exchange regimes. The result is also robust to the inclusion of a broader indicator of structural reforms that usually go along with changes in central bank legislation, illustrating the complementary nature of various aspects of economic reform. The paper fails, however, to find a causal relationship running from CBI to inflation.
    Keywords: Central bank legislation , Latin America , Central bank role , Inflation , Structural adjustment ,
    Date: 2005–04–21
  132. By: Sule Alan (Department of Economics, York University)
    Abstract: Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising one is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies strongly point to a significant structural (state) dependence in the the stock market entry decision, which is consistent with costs of these types. However, the magnitude of these costs are not yet known. This paper focuses on fixed stock market entry costs. I set up a structural estimation procedure which involves solving and simulating a life cycle intertemporal portfolio choice model augmented with a fixed stock market entry cost. Important features of household portfolio data (from the PSID) are matched to their simulated counterparts. Utilizing a Simulated Minimum Distance estimator, I estimate the coefficient of relative risk aversion, the discount factor and the stock market entry cost. Given the equity premium and the calibrated income process, I estimate a one-time entry cost of approximately 2 percent of (annual) permanent income. My estimated model matches the zero median holding as well as the hump-shaped age-participation profile observed in the data.
    Keywords: Entry costs, Stock market, Structural estimation
    JEL: G11 D91
    Date: 2005–01
  133. By: Rishi Goyal; A. Mushfiq Mobarak; Susan Creane; Randa Sab
    Abstract: Based on data collected on a wide range of financial sector indicators, new indices of financial development for countries in the Middle East and North Africa (MENA) are constructed, encompassing six themes: development of the monetary sector and monetary policy, banking sector development, nonbank financial development, regulation and supervision, financial openness, and institutional quality. The paper finds that the degree of financial development varies across the region. Some countries have relatively well-developed banking sectors and regulatory and supervisory regimes. However, across the region, more needs to be done to reinforce the institutional environment and promote nonbank financial sector development. Based on a subset of indicators, the MENA region is found to compare favorably with a few other regions, but it ranks far behind the industrialized countries and East Asia.
    Keywords: Financial Sector , Middle East , Africa , Development ,
    Date: 2004–11–02
  134. By: Paolo Manasse; Nouriel Roubini
    Abstract: This paper contains an empirical investigation of the set of economic and political conditions that are associated with a likely occurrence of a sovereign debt crisis. We use a new statistical approach (Binary Recursive Tree) that allows us to derive a collection of "rules of thumb" that help identify the typical characteristics of defaulters. We find that not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks. We also characterize the set of fundamentals that can be associated with a relatively "risk free" zone. This classification is important for discussing appropriate policy options to prevent crises and improve response time and prediction.
    Keywords: External Debt , Financial crisis , Debt restructuring ,
    Date: 2005–03–11
  135. By: Olivier Jeanne
    Abstract: This paper presents a theory of the maturity of international sovereign debt and derives its implications for the reform of the international financial architecture. It presents a general equilibrium model in which the need to roll over external debt disciplines the policies of debtor countries but makes them vulnerable to unwarranted debt crises owing to bad shocks. The paper presents a welfare analysis of several measures that have been discussed in recent debates, such as the adoption of renegotiation-friendly clauses in debt contracts and the establishment of an international bankruptcy regime for sovereigns.
    Keywords: External debt , International financial system , Collective action clauses , Insolvency , Economic models ,
    Date: 2004–08–11
  136. By: Alain Borghijs; Louis Kuijs
    Abstract: Central European accession countries (CECs) are currently considering when to adopt the euro. From the perspective of macroeconomic stabilization, the cost or benefit of giving up a flexible exchange rate depends on the types of asymmetric shocks hitting the economy and the ability of the exchange rate to act as a shock absorber. Economic theory suggests that flexible exchange rates are useful in absorbing asymmetric real shocks but unhelpful in the case of monetary and financial shocks. For five CECs-the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia-empirical results on the basis of a structural VAR suggest that in the CECs the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks.
    Keywords: Exchange rates , Czech Republic , Hungary , Poland , Slovak Republic , Slovenia ,
    Date: 2004–01–23
  137. By: Sarma Jayanthi; Tamim A. Bayoumi; Jaewoo Lee
    Abstract: This paper describes the result and the methodology of updating nominal and real effective exchange rate weights on the basis of trade data over 1999-2001. The underlying framework is an updated version of the IMF's current effective exchange rate calculation, which uses weights largely based on 1989-91 data. Since then, substantial changes have occurred in international trade relations, warranting a recalculation of effective exchange rate indices on the basis of new trade patterns. Updated weights show that the United States and developing countries (most notably China) have grown in their importance in global trade, while Japan and the European Union have declined, with substantial implications for the path of the dollar and exchange rate effects of emerging market crises since 1995.
    Keywords: Interest rates , Exchange rates , Economic models ,
    Date: 2005–06–01
  138. By: Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University) (Department of Economics, Georgetown University)
    Abstract: This paper presents a new numerical method for solving general equilibrium models with many assets. The method can be applied to models where there are heterogeneous agents, time-varying investment opportunity sets, and incomplete markets. It also can be used to study models where the equilibrium dynamics are non-stationary. We illustrate how the method is used by solving a one— and two-sector versions of a two—country general equilibrium model with production. We check the accuracy of our method by comparing the numerical solution to the one-sector model against its known analytic properties. We then apply the method to the two-sector model where no analytic solution is available. Classification-JEL Codes: C68; D52; G11.
    Keywords: Portfolio Choice; Perturbation Methods; Incomplete Markets; Asset Prices.
  139. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: The founders of the Bretton Woods System 60 years ago were primarily concerned with orderly exchange rate adjustment in a world economy that was characterized by widespread restrictions on international capital mobility. In contrast, the rapid pace of financial globalization during recent years poses new challenges for the international monetary system. In particular, large gross cross-holdings of foreign assets and liabilities mean that the valuation channel of exchange rate adjustment has grown in importance, relative to the traditional trade balance channel. Accordingly, this paper empirically explores some of the interconnections between financial globalization and exchange rate adjustment and discusses the policy implications.
    Keywords: Globalization , Financial assets , Capital flows , Exchange rates , Emerging markets , Economic models ,
    Date: 2005–01–18
  140. By: François Leroux; Roland Daumont; Françoise Le Gall
    Abstract: The purpose of this paper is to study the origins of banking crises in sub-Saharan Africa, drawing upon the experience of ten countries during the period 1985-95. It examines, in particular, which factors were the most important sources of these crises. The conclusions underscore that the banking crises examined did not represent an entirely special case-a number of factors identified in the general literature, including macroeconomic shocks, were highly relevant-but note that several of their features were nonetheless specific to this part of the world. These banking crises were the very prototype of endemic crises associated with heavy government intervention in the banking system. In this regard, the paper analyzes the complex role of the government in banking in sub-Saharan Africa, the many channels through which governments intervened, and the economic and institutional environment in which the banks operated.
    Keywords: Banking systems , Africa , Financial crisis , Intervention , Bank regulations ,
    Date: 2004–04–20
  141. By: Abbas Mirakhor; Iqbal Mehdi Zaidi
    Abstract: This paper studies the implications of foreign currency deposits (FCDs) for international liquidity shortages in Pakistan. The analysis focuses on how the large volume of FCDs and the specific institutional characteristics of those deposits have made the Pakistan economy highly vulnerable to exogenous shocks. The analysis shows that FCDs created another channel for government borrowing, and fiscal sustainability in a "closed" system may be very different from sustainability in a more "open" system. There is a need to think of these issues in terms of total balance sheet vulnerability, and we recommend measures that would make domestic-currency-denominated assets attractive to investors.
    Keywords: Capital account liberalization , Pakistan , International liquidity , Dollarization ,
    Date: 2004–09–15
  142. By: Jens R. Clausen; Magda E. Kandil
    Abstract: The paper investigates cyclical fluctuations in the current and financial (formerly capital) accounts of the balance of payments and major underlying components for nine industrial countries. The empirical model uses as explanatory variables domestic output growth, price inflation, real exchange rate fluctuations, energy price inflation, global growth, and regional growth. The evidence from the estimation of the model indicates the importance of fluctuations in output growth to the cyclicality of the current and financial account balances. The necessary and sufficient condition to sustain a large current account deficit is high domestic growth, which tends to stimulate financial inflows and provides adequate resources for financing. Other factors appear to be less important to the cyclicality of the current and financial account balances and their negative correlations.
    Keywords: Current account , Australia , Canada , Denmark , France , Germany , Italy , New Zealand , Sweden , United Kingdom , Capital account , Production , Economic models ,
    Date: 2005–03–24
  143. By: Ashoka Mody; Nienke Oomes; Michael D. Bordo
    Abstract: In this paper, we examine the IMF's role in maintaining the access of emerging market economies to international capital markets. We find evidence that both macroeconomic aggregates and capital flows improve following the adoption of an IMF-supported program, although they may initially deteriorate somewhat. Consistent with theoretical predictions and earlier empirical findings, we find that IMF-supported programs are most successful in improving capital flows to countries with bad, but not very bad fundamentals. In such countries, IMF-supported programs are also associated with improvements in the fundamentals themselves.
    Keywords: Fund role , Capital inflows , Emerging markets ,
    Date: 2004–10–22
  144. By: Luis Ignacio Jácome
    Abstract: This paper stresses three factors that amplified the 1990s financial crisis in Ecuador, namely institutional weaknesses, rigidities in public finances, and high financial dollarization. Institutional factors restricted the government's ability to respond in a timely manner and efficiently enough to prevent the escalation of the banking crisis and spurred the adoption of suboptimal policy decisions. Public finance rigidities limited the government's capacity to correct existing imbalances and the deteriorating fiscal stance associated with the costs of the financial crisis. Financial dollarization increasingly reduced the effectiveness of financial safety nets, fostered foreign currency demand, and accelerated a currency crisis, thereby further worsening the solvency of banks. These three factors reinforced each other, exacerbating costs as the economy went through a triple banking, currency, and fiscal crisis.
    Keywords: Financial crisis , Ecuador , Fiscal policy , Dollarization ,
    Date: 2004–02–09
  145. By: Se-Jik Kim
    Abstract: This paper proposes that international rescue financing should not be provided to a country where a crisis first occurs, but rather to any country that suffers a subsequent crisis. Such a timing-based lending facility can be Pareto-superior to both laissez-faire and existing international crisis lending facilities, when domestic governments have more information on their own economies than does the international lender of last resort. The new facility mitigates moral hazard owing to information asymmetry by not rescuing the first-hit country. At the same time, it limits crisis contagion by rescuing countries in subsequent crises. Even in the presence of common shocks, the timing-based facility can reduce global risks of crisis because it induces countries to undertake greater crisis-prevention efforts so as not to become the first country hit.
    Keywords: Loans , Borrowing , Economic models ,
    Date: 2004–02–03
  146. By: Rodney Ramcharan
    Abstract: Does the choice of exchange rate regime affect the way an economy's adjustment to real shocks? Exploiting the randomness of natural shocks, this paper assesses empirically the often contrasting answers found in the theoretical literature. The evidence supports key themes in this literature, and points to an important tradeoff between regimes. First, adverse natural shocks are associated with both higher investment and foreign direct investment (FDI) only in developing countries with fixed rate regimes. Second, over a 24-month horizon, growth rebounds earlier in flexible rate regimes. Third, in the long run, more adverse shocks are associated with higher growth and investment only in predominantly fixed regimes. Thus, while claims of faster adjustment to real shocks under flexible rate arrangements have merit, so does the idea that exchange rate variability can impede investment. And the benefits from faster adjustment may come at the cost of foregoing the long run productivity benefits embodied in the larger investment response in fixed rate regimes.
    Keywords: Exchange rate regimes , Investment ,
    Date: 2005–05–10
  147. By: Tommaso Reggiani (Università di Milano-Bicocca, Dipartimento di Economia Politica #STUDENT#)
    Abstract: “I maggiori cambiamenti riguardano la gamma dei prodotti finanziari. Il clima e la filosofia di base con cui vengono proposti - l’ottica del villaggio, dei gruppi di progetto e dell’assistenza nella quotidianità - rimangono immutati. La preponderanza del soggetto femminile e del lavoro in comune restano fortemente radicati”. Questa è l’efficace sunto proposto da Stuart Rutherford riguardante il nuovo assetto che ha assunto la Grameen Bank. Dopo 25 anni di efficace opera contro la povertà, la banca dei poveri fondata da Muhammd Yunus, ha intrapreso un nuovo percorso atto all’innovazione della pratica del microcredito, così da renderlo ancora più fecondo e relazionalmente - a mio avviso - valorizzante. In questo scritto passeremo prima in rassegna le principali innovazioni - apportate al sistema originario e tradizionale di microcredito proposto dalla Grameen Bank ovvero il Grameen Classic System (GCS) - inerenti i prodotti e l’organizzazione operativa, per poi passare ad un’accurata disamina delle implicazioni che questa evoluzione comporta a livello squisitamente relazionale tra gli agenti coinvolti nel fenomeno, sviluppando le dinamiche ed i nessi che emergono all’interno del rapporto fra il singolo ed il gruppo e viceversa. L’intera analisi ed argomentazione è basata su “Grameen Bank II: designed to open new possibilities” , documento programmatico di riorganizzazione steso da Muhammad Yunus nel 2002, nonché sulla serie di papers di analisi consuntiva “MicroSave: briefing notes on Grameen II” pubblicati nel 2005. La disamina ed i giudizi inerenti l’aspetto relazionale, sono cura di chi scrive.
    Keywords: Grameen Bank, Grameen Bank II, Yunus, Microcredito, Finanza etica
    JEL: O P
    Date: 2005–10–19
  148. By: James M. Boughton
    Abstract: The International Monetary Fund was designed during World War II by men whose worldview had been shaped by the Great War and the Great Depression. Their views on how the postwar international monetary system should function were also shaped by their economics training and their nationalities. After the IMF began functioning as an institution, its evolution was similarly driven by a combination of political events (Suez, African independence, the collapse of global communism), economic events (the rising economic power of Europe, the Middle East, and Asia), and trends and cycles in economic theory (the monetary approach to the balance of payments, new classical economics, the rise and fall of the Washington Consensus). As they happened, these forces had effects that were perceived as adaptations to current events and new ideas within a fixed institutional structure and mandate. The cumulative effect of history on the institution has been rather more profound and requires a longer and larger perspective.
    Keywords: Fund , Fund history , Financial institutions , International capital markets , Debt problems , Monetary measures , Balance of payments , Floating exchange rates , Supply-side policy , Inflation targeting , Globalization ,
    Date: 2004–05–21
  149. By: Garry J. Schinasi
    Abstract: The main objective of this paper is to propose a definition of financial stability that has some practical and operational relevance. Financial stability is defined in terms of its ability to facilitate and enhance economic processes, manage risks, and absorb shocks. Moreover, financial stability is considered a continuum: changeable over time and consistent with multiple combinations of the constituent elements of finance. The paper also discusses several practical implications of the definition that should be considered when using it for policy analysis or developing an analytical framework.
    Keywords: Financial stability , Financial crisis ,
    Date: 2004–10–13
  150. By: Nienke Oomes
    Abstract: This paper evaluates competitiveness in Slovakia and estimates the equilibrium real exchange rate for the koruna. Slovak wages and prices are found to have been relatively low even when adjusted for differences in relative income and productivity, suggesting an undervalued real exchange rate. However, recent rapid nominal appreciation has reduced most or all of this undervaluation and has brought the real exchange rate near or above equilibrium. The productivity-driven equilibrium real appreciation rate during 2005?09 is estimated at close to 3 percent per year but can be lower with the help of fiscal consolidation.
    Keywords: Prices , Slovak Republic , Real effective exchange rates , Exchange rate appreciation ,
    Date: 2005–04–04
  151. By: Julia Majaha-Jartby; Thordur Olafsson
    Abstract: The paper's central theme is that where a financial crisis emerges, regional supervisors should have systems in place to effectively respond to their country-specific crises and-in the case of foreign operations and financial conglomerates-to collaborate comprehensively with other supervisory agencies and respective ministries to avert a regional crisis or address the immediate crisis at hand. For financial institutions to expand across borders without undermining regional and global financial stability, supervisory agencies must develop the capacity to collaboratively and collectively handle crises.
    Date: 2005–07–05
  152. By: Rossi, Barbara; Giacomini, Raffaella
    Abstract: We provide an extensive evaluation of the predictive performance of the U.S. yield curve for U.S. GDP growth by using a new test for forecast breakdown as well as a variety of in-sample and out-of-sample testing procedures. Empirical research over the past decades uncovered a strong predictive relationship between the yield curve and output growth. However, the parameter estimates that describe this empirical relationship were not stable over time. We document the existence of a forecast breakdown in this relationship over the past three decades, and find it relevant especially in the seventies and eighties. We also provide empirical support for the theoretical conjecture that the cause of the forecast failure is closely linked to changes in the monetary policy of the Fed.
    JEL: C22 C52 C53
  153. By: Ashoka Mody; Eisuke Okada; Enrica Detragiache
    Abstract: A widely held nostrum is that countries should exit heavily managed exchange rate regimes when the going is good, rather than when the exchange rate is under pressure to depreciate. Have countries followed this advice in practice? And, if so, how good has the going been? We find that in the past 25 years or so, almost all exits to more flexible regimes were followed by a depreciation of the exchange rate, and that exits were about evenly divided between disorderly and orderly cases. A logit econometric model, indicates that the general circumstances of orderly and disorderly exits have been broadly similar: an overvalued real exchange rate, falling reserves, a difficult fiscal position, and high world interest rates. Wellestablished pegs were less likely to end.
    Keywords: Exchange rate regimes , Economic models ,
    Date: 2005–03–07
  154. By: Jan Kakes; Garry J. Schinasi; Aerdt G. F. J. Houben
    Abstract: This paper examines the emergence of financial stability as a key policy objective. It discusses the underlying trends in the financial system, as well as the role of finance in relation to money, the real economy, and public policy. Financial stability is defined in terms of its ability to help the economic system allocate resources, manage risks, and absorb shocks. Moreover, financial stability is considered a continuum, changeable over time and consistent with multiple combinations of its constituent elements. On the basis of these concepts, a framework is presented that comprises an encompassing analysis and assessment of financial stability, and maps out broad policy implications.
    Keywords: Financial stability , Financial systems , Public finance ,
    Date: 2004–07–06
  155. By: Laura Alfaro; Sebnem Kalemli-Ozcan; Vadym Volosovych
    Abstract: We describe the patterns of international capital flows in the period 1970 - 2000. We then examine the determinants of capital flows and capital flows volatility during this period. We find that institutional quality is an important determinant of capital flows. Historical determinants of current legal institutions have a direct effect on foreign investments. Policy plays a significant role in explaining the changes in the level of capital flows over time and their volatility.
    JEL: F21 F41 O1
    Date: 2005–10
  156. By: Silvia Sgherri; Tamim A. Bayoumi
    Abstract: This paper proposes a markedly different transmission mechanism from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated U.S. monetary model distinguishing four monetary regimes employed since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.
    Keywords: Monetary policy , Inflation , Central Banks , Economic models ,
    Date: 2004–10–21
  157. By: Márcio Valério Ronci
    Abstract: This paper assesses the effect of constrained trade finance on trade flows in countries undergoing financial and balance of payments crises. Most of the countries that had a major crisis had a significant trade contraction, while trade-related finance declined sharply. However, trade may also be affected by other variables such as world demand, domestic demand, banking crises, changes in export and import prices, and real exchange rate depreciation. To estimate the effect of constrained trade finance on trade flows, we estimate import and export volume equations including explicitly trade financing as an explanatory variable in addition to the usual variables such as relative prices and income. We conclude that constrained trade finance is a factor in explaining both export and import volumes in the short-run. A fall in external trade finance explains a relatively small part of the trade loss during crises, while a fall in trade financing in connection with domestic banking crisis can lead to a substantial loss of trade.
    Keywords: Trade , Public finance , Financial crisis ,
    Date: 2004–12–13
  158. By: Alexandros Kontonikas, Alberto Montagnoli and Nicola Spagnolo
    Abstract: In this paper we investigate the interaction between inflation and stock market volatility. We employ unconditional and conditional volatility measures, the latter derived from a Bivariate GARCH model with the BEKK representation. The results indicate that once the impact of IT is taken into account, the relationship between inflation and stock market volatility ceases to be positive and be comes negative in line with the New Environment Hypothesis. The implication for monetary policy design is that focusing on price stability alone may not be a suffcient condition for financial stability.
    JEL: C22 E31 E44 E52
  159. By: Michael Andrews
    Abstract: This paper provides an overview of the possible linkages between state-owned banks, privatization, and banking sector crises. Data on privatizations in over 65 countries is used together with data from the banking crisis literature to consider the relationship between state-owned banks and financial sector stability. The paper draws on the existing literature to provide guidance to policymakers regarding bank privatization.
    Keywords: Financial stability , Banking systems , Privatization , Financial crisis ,
    Date: 2005–01–31
  160. By: Valerie Cerra; Sweta Chaman Saxena
    Abstract: Sweden represents an archetypal welfare state economy, with extensive government safety nets. Some scholars have attributed a decline in its per capita income ranking since 1970 to "eurosclerosis" or sluggish growth caused by distortionary policies. This paper argues rather, that the permanent loss in output following Sweden's banking crisis in the early 1990s explains the decline in its per capita GDP ratings. The paper finds no macroeconomic evidence that welfare state policies have deterred growth. The results warn that empirical growth analyses should distinguish between trend output growth and permanent output loss associated, for example, with financial crises.
    Keywords: Production , Sweden , Financial crisis , Social policy , Income ,
    Date: 2005–02–25
  161. By: Richard Podpiera
    Abstract: We explore the relationship between banking sector performance and the quality of regulation and supervision as measured by compliance with the Basel Core Principles for Effective Banking Supervision (BCP). Using BCP assessment results for 65 countries and 1998-2002 panel data for other variables, we find a significant positive impact of higher compliance with BCP on banking sector performance, as measured by nonperforming loans and net interest margin, after controlling for the level of development of the economy and the financial system and macroeconomic and structural factors.
    Keywords: Basel Core Principles , Banking , Loans , Interest rates on loans , Economic models ,
    Date: 2004–11–10
  162. By: Ila Patnaik; Ajai Shah
    Abstract: The easing of controls on interest rates has led to higher interest rate volatility in India. Hence, there is a need to measure and monitor the interest rate exposure of Indian banks. Using publicly available information, this paper attempts to assess the interest rate risk carried by a sample of Indian banks in March 2002. We find evidence of substantial exposure to interest rates.
    Keywords: Interest rates , India , Banks ,
    Date: 2004–02–13
  163. By: Mark Kruger; Miguel Messmacher
    Abstract: We construct a financial vulnerability indicator that is consistent with the theoretical literature on determinants of defaults. It is based on the amount of new foreign financing that is needed to avoid a default or an import adjustment, expressed as a proportion of the country's sources of foreign currency. As the need for new foreign financing increases, so does a country's financial vulnerability. The indicator has a higher correlation with default episodes than other indicators used in previous studies. In addition, the level at which it leads to a high probability of default is comparable across countries.
    Keywords: External debt , Financial crisis , Cofinancing , Economic indicators , Crisis prevention ,
    Date: 2004–04–12
  164. By: Saleh M. Nsouli; Connel Fullenkamp
    Abstract: The literature on the economic effects of electronic money and banking lacks organization and a common analytical framework. This paper identifies the main issues raised by e-money and e-banking and presents them as six puzzles. Our solutions to the puzzles build a framework for analyzing the effects of e-money and e-banking, and for choosing the appropriate approach to regulating electronic money and banking. Although electronic money and banking will likely not fulfill the more dire predictions in the literature, such as the possible loss of central banks' ability to control the money supply, they nonetheless will need to be regulated carefully.
    Keywords: Banking , Monetary policy ,
    Date: 2004–02–17
  165. By: Marcos Chamon
    Abstract: Several papers argue that debt crises can be the result of self-fulfilling expectations that no one will lend to a country. I show this type of coordination failure can be eliminated by a combination of state-contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well. This suggests that runs on the debt of a single borrower (such as the government) can be eliminated, and that self-fulfilling features are more plausible when articulated in a context in which externalities among many decentralized borrowers allow for economy-wide debt runs to occur.
    Keywords: Financial crisis , External debt , Public debt , Crisis prevention , Liquidity ,
    Date: 2004–06–29
  166. By: Nikolay Gueorguiev; Christoph Duenwald; Andrea Schaechter
    Abstract: Rapid credit growth in Bulgaria, Romania, and Ukraine has been driven by successful macroeconomic stabilization, robust growth, and capital inflows. While financial deepening is both expected and welcome, the recent expansions appear to have been excessive, as evidenced by widening current account deficits in Bulgaria and Romania, and prudential concerns in Ukraine. Policy responses have included attempts to both moderate credit growth and offset its impact on domestic demand, with mixed success thus far.
    Keywords: Transition economies , Bulgaria , Romania , Ukraine , Credit ,
    Date: 2005–07–08
  167. By: Robert Cull; Lance E. Davis; Naomi R. Lamoreaux; Jean-Laurent Rosenthal
    Abstract: We focus on the economies of the North Atlantic Core during the nineteenth and early twentieth centuries and find that an impressive variety of local financial institutions emerged to supply the needs of SMEs wherever there was sufficient demand for their services. Although these intermediaries had significant weaknesses, they were able to tap into local information networks and so extend credit to firms that were too young or small to secure funds from large regional or national institutions. In addition, by raising the return to savings for local households, they helped to mobilize significant new resources for economic development.
    JEL: G2 N2
    Date: 2005–10
  168. By: Vivian Z. Yue; Samir Jahjah
    Abstract: We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real exchange rate misalignment. The main findings are: (1) real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; (2) spreads and the likelihood of issuing bonds depend on the exchange rate regime; (3) exchange rate misalignment under a hard peg significantly increases bond spreads; (4) in time of debt crises, exchange rate policy also greatly affects the sovereign bond market, especially through exchange rate overvaluation.
    Keywords: Exchange rate regimes , Bond issues , Developing countries , Debt , Credit , Financial crisis , Economic models ,
    Date: 2004–11–15
  169. By: Jeromin Zettelmeyer; Federico Sturzenegger
    Abstract: This paper estimates bond-by-bond "haircuts"-realized investor losses-in recent debt restructurings in Russia, Ukraine, Pakistan, Ecuador, Argentina, and Uruguay. We consider both external and domestic retructurings. Haircuts are computed as the percentage difference between the present values of old and new instruments, discounted at the yield prevailing immediately after the exchange. We find average haircuts ranging from 13 percent (Uruguay external exchange) to 73 percent (2005 Argentina exchange). We also find within-exchange variations in haircuts, depending on the instrument tendered. With exceptions, domestic residents do not appear to have been treated systematically better (or worse) than foreign residents.
    Keywords: Debt restructuring , Russian Federation , Ukraine , Pakistan , Ecuador , Argentina , Uruguay , Bond markets , Sovereign Debt Restructuring Mechanism , Financial crisis ,
    Date: 2005–07–28
  170. By: Richard Podpiera; Dmitriy Rozhkov; Plamen Iossifov; Udaibir S. Das
    Abstract: In this paper, we develop multi-country indices of financial system stress and quality of financial policies and use them in regression analysis of the determinants of financial stress. We find that countries with higher quality of financial policies are better able to contain the effects of macroeconomic pressures on the overall level of stress in the financial system. They are also in a better position to ensure sustainable development of the financial system.
    Keywords: Financial crisis , Financial systems ,
    Date: 2005–09–13
  171. By: Etibar Jafarov; Anne Marie Gulde; Vassili Prokopenko
    Abstract: This paper discusses costs, benefits, and implementation challenges of a possible currency union between Belarus and Russia. It shows that Belarus and Russia are economically closely linked but nevertheless do not fulfill all "optimal currency area" criteria, especially the macroeconomic symmetry condition. Furthermore, we argue that the different speeds of economic liberalization over the past decade have resulted in different economic structures, with Belarus still dependent on monetary financing of budgets and industries. However, a final cost-benefit analysis also needs to consider that currency unification may bring substantial benefits from reduced transaction costs, an improved macroeconomic environment in Belarus, and by acting as a catalyst to advance structural reforms in Belarus.
    Keywords: Monetary unions , Belarus , Russian Federation , Currencies ,
    Date: 2004–12–22
  172. By: Paul Louis Ceriel Hilbers; Matthew T. Jones; Graham L. Slack
    Abstract: Stress testing is becoming a widely used tool to assess potential vulnerabilities in a financial system. This paper is intended to answer some of the basic questions that may arise as part of the process of stress testing. The paper begins with a discussion of stress testing in a financial system context, highlighting some of the differences between stress tests of systems and of individual portfolios. The paper provides an overview of the process itself, from identifying vulnerabilities, to constructing scenarios, to interpreting the results. The experience of the IMF in conducting stress testing as part of the Financial Sector Assessment Program (FSAP) is also discussed.
    Keywords: Financial soundness indicators , Financial systems , Financial Sector Assessment Program ,
    Date: 2004–07–29
  173. By: M. Ayhan Kose; Eswar Prasad; Marco Terrones
    Abstract: The influential work of Ramey and Ramey (1995) highlighted an empirical relationship that has now come to be regarded as conventional wisdom-that output volatility and growth are negatively correlated. We reexamine this relationship in the context of globalization-a term typically used to describe the phenomenon of growing international trade and financial integration that has intensified since the mid-1980s. Using a comprehensive new data set, we document that, while the basic negative association between growth and volatility has been preserved during the 1990s, both trade and financial integration significantly weaken this negative relationship. Specifically, we find that, in a regression of growth on volatility and other controls, the estimated coefficient on the interaction between volatility and trade integration is significantly positive. We find a similar, although less significant, result for the interaction of financial integration with volatility.
    Keywords: Globalization , International trade , International financial system , International capital markets , Economic growth ,
    Date: 2005–02–04
  174. By: Ansgar Belke (University of Hohenheim and IZA Bonn); Bernhard Herz (University of Bayreuth); Lukas Vogel (University of Bayreuth)
    Abstract: We test the significance of the relationship between the exchange rate regime and the degree of structural reforms by estimating panel regressions for a world and an OECD country sample. The empirical results suggest a positive correlation between on the one side the adoption of an exchange rate rule and on the other side overall structural reforms as well as reforms in the money and banking sector in the broad country sample. For government size and for market regulation, we do not find any robust significant effect, however. The results do not confirm the main implication of Calmfors-type models, namely a higher degree of reforms under monetary policy autonomy. They corroborate conditional policy convergence and, partly, that limiting monetary policy autonomy fosters structural reforms.
    Keywords: exchange rates, monetary policy regime, liberalisation, panel data, political economy of reform
    JEL: D78 E52 E61
    Date: 2005–10
  175. By: Gerhard Schroeder (University of Flensburg, private lessons)
    Abstract: Critics regarding the Black and Scholes model aren't new. The model was about of being labelled 'historic'. It is new now that the model has become an auto-nomous, unreflected item in international accounting standards and law. There is no economial relation between the future value of an underlying and it's current volatility. Predictions - pricing of derivatives means predicting - remain uncertain. Findings are based on empirical, experimental techniques using fictituous derivatives e.g., thought experimets, others.
    Keywords: Black Scholes, FASB,IAS, IFRS, Accounting, fair value, option pricing, stochastic pricing, derivatives
    JEL: F3 F4
    Date: 2005–10–16
  176. By: Yin-Wong Cheung; Menzie David Chinn; Antonio Garcia Pascual
    Abstract: We reassess exchange rate prediction using a wider set of models that have been proposed in the last decade. The performance of these models is compared against two reference specifications-purchasing power parity and the sticky-price monetary model. The models are estimated in first-difference and error-correction specifications, and model performance is evaluated at forecast horizons of 1, 4, and 20 quarters, using the mean squared error, direction of change metrics, and the "consistency" test of Cheung and Chinn (1998). Overall, model/specification/currency combinations that work well in one period do not necessarily work well in another period.
    Keywords: Exchange rates , Monetary measures , Productivity , Interest rates , Purchasing power parity , Forecasting models ,
    Date: 2004–05–14

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